Beyond the Break Clause: Are you struggling to exercise your break clause?
Here, Partner of the Real Estate Team at Beyond Corporate Law, Hannah Al-Shaghana, discusses the frequently used break clauses in commercial leases and highlights the key things that tenants need to know in order to leave their lease early.
Break clauses are frequently used in commercial leases, primarily for a Tenant’s benefit. A break clause provides an opportunity for a party to terminate their lease earlier than the end of the term, usually on satisfaction of certain break clause “conditions”.
In my experience, I find that many Tenants struggle to exercise their break clause correctly or find that they are out of time. Please note that if the break clause conditions are not exercised correctly, the Tenant will lose its right to break and the Tenant will continue to be bound by the lease terms until the expiry of the lease. The purpose of this article is to therefore highlight the common pitfalls in relation to exercising break clause conditions.
Most Landlords will require that certain conditions are satisfied for a Tenant to break the lease.
The popular break conditions are:
- That the Tenant pays all the rents as and when they fall due; and/or
- That the Tenant pays a premium to exercise the break; and/or
- That the Tenant provides “vacant possession”; and/or
- That the Tenant has complied with its repairing obligation.
Whilst these are commonly requested break conditions, of course it all depends on strategic negotiations between the parties and good legal drafting as to whether any / all of these conditions are contained in your lease.
See below a summary of the legal pitfalls in relation to some of these commonly used conditions:
Pay all rents that falls due – This means that by the break date, the Tenant must pay all rents as and when they fall due. “All rents” means all sums due under the lease (so this would also include interest that might be payable on late payments). This does not mean that you should pick and choose which of the rents or invoices you should pay, nor does it mean that you can pro rata any invoice payments (i.e., if you think that some or most of an invoice relates to a period after the break date). This is a mistake that Tenants often make. If you receive an insurance rent invoice a month before the break date, you must pay the whole of that sum notwithstanding the fact that most of that payment relates to a period beyond the break date. If your lease is drafted well, there will be a provision in the lease compelling the landlord to reimburse you after the break date for any payments that relate to a period of the break date.
Pay a break premium – Is there an obligation to pay the Landlord a break premium? If so, what is the amount of that premium and when is it to be paid? Is VAT payable on that premium? I have seen many Tenants who pay the premium too late, so the payment hits the Landlord’s designated bank account after the break date. This would invalidate the break.
Vacant Possession – Please be aware that the legal term “vacant possession” is very strictly interpreted by the courts. Its legal meaning is somewhat different from its natural non-legal English meaning. Vacant possession, based on a strict interpretation, means that the Tenant needs to ensure that the following matters are fulfilled by the break date:
- That the Tenant vacates/exits the property;
- That there are no third parties or occupiers in the property (including any contractors or any agents) Please note that in the 2011 NYK Logistics case¹, the Court of Appeal held that the Tenant had not provided vacant possession because there were two workmen doing some outstanding works at the property following the break date to finish off outstanding repairs;
- The property is free from all contents, rubbish etc,;
- Unless otherwise agreed, all fixtures and fittings are removed from the property. In the 2016 NHS case², it was determined that the Tenant had not given vacant possession because it had not removed its fit out. The fit out comprised of demountable partitioning, window blinds and kitchen units.
Comply with the repairing obligation – All tenants must resist a condition such as this. On a strict interpretation of this clause, any disrepair (however minor and immaterial) outstanding at the date of the break date would invalidate your right to break. There have been several cases that have litigated over this point. In the 2014 Henderson case ³, the Tenant’s attempt to break the lease failed on the grounds that they had not kept the fencing in good repair. The Tenant had patched up the holes in the fence rather than replace the fence and it was determined that this patched up fence was not in good repair and not consistent with the rest of the remaining fencing.
To conclude, break clause conditions need to be certain, reasonable, and performable. Where any aspect of a break clause is vague or ambiguous, such interpretation could be subject to challenge. If you do need any advice in relation to break clauses and the conditions attached to them, please do not hesitate to contact me on the details below.
¹ 2011 NYK Logistics case = NYK Logistics (UK) Ltd v Ibrend Estates BV  EWCA Civ 683
² 2016 NHS case = Riverside Park Ltd v NHS Property Services Ltd  EWHC 1313 (Ch) (27 July 2016)
³ 2014 Henderson case = Sirhowy Investments Ltd v Henderson  EWHC 3562
By Hannah Al-Shaghana