FMJ Facilities Management magazine providing industry-specific intelligence to FM and property professionals
Commercial Property Lawyer Karen Mason and Co-Founder of specialist real estate law firm Newmanor Law, offers advice on negotiating a break clause that is appropriate for your business
With many of the COVID-related restrictions having now been lifted, many organisations are beginning to adjust to life after the pandemic, which includes renegotiating new leases that better define their current situation.
During lockdown, flexible working patterns were adopted as a way of adhering to social distancing guidelines, and it now looks as though this will continue as a long-term culture within many businesses.
However, agreeing a new and improved lease, with the inclusion of a break clause, is not always straightforward and business owners are encouraged to seek professional legal advice from the outset, especially during the process of drafting a break clause.
UNCERTAINTY IN THE MARKET
The downturn in real estate letting appears to be widespread according to research from property experts CBRE. Statistics show that office investment in the first quarter of 2021 was down 65 per cent on the previous quarter and 37 per cent on Q1 of 2020.
This downturn has undoubtedly been accelerated by the widespread adoption of hybrid working patterns throughout the pandemic. This is the backdrop against which any consideration of the changing nature of commercial leases takes place, with the slump in overall demand for office space impacting on the kind of clauses tenants and landlords will be negotiating.
NEGOTIATING AN EFFECTIVE BREAK CLAUSE
Due to the uncertainty caused by the pandemic, a growing number of tenants have been tempted to utilise existing break clauses or insert them into leases, as a way of exiting agreements early.
The inclusion of such a clause offers increased flexibility to tenants and landlords alike, as it enables either party to terminate the lease, as long as certain requirements have been met.
For example, an organisation with a 10-year lease, might seek to insert a clause which will give them the option to exit the lease at any point after four years as long as six months’ notice is given.
Given the current state of the commercial property market, the inclusion of a break clause can be one of the main sticking points during negotiations between tenants and landlords.
THE IMPACT OF A BREAK CLAUSE
As a leaseholder, a break clause will enable you to walk away from an agreement if the commercial space is no longer needed or you need to downsize your office space to save money and protect jobs. Equally, landlords can use them to remove tenants should there be the potential to raise rents or make more money from a new tenant more ideally suited to the space. In the past tenants have been reluctant to give landlords break options, but in the new conversations this could be mutual.
Whilst a break clause can have tangible benefits for the party seeking to utilise it, the process itself is far from simple. As such, it is imperative that both parties consider the clause and mechanics for implementation carefully, because any disagreement about whether the provisions have been met can lead to expensive and time-consuming legal action.
From a tenant’s perspective, the tenant must realise that triggering a clause will leave the landlord with the task of having to re-let the premises at relatively short notice, so the landlord will usually look to resist the exercise of any break clause.
COMMON DISPUTES
The Royal Institution of Chartered Surveyors (RICS) published a ‘Code for leasing business premises, England and Wales’ in February 2020, which states that the break clause should only be conditional on “the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers …”.
This sounds relatively simple, but the reality is that many landlords insist on going beyond what is only a voluntary code and imposing stricter conditions. In many cases the landlord may attempt to link the triggering of the break clause with the wider covenants of the lease, such as the requirement to return the property in a specific condition, or to undo any alterations carried out during the Lease term.
Disputes between landlords and tenants about the exercise of break clauses are very common. It is very easy for a tenant to get the exercise of even a very simple clause wrong. It would be wise, therefore, for any tenant uncertain of their compliance with conditions to employ the services of a specialist real estate lawyer or surveyor to closely work through the break clause and how it is to be exercised.
SEEKING LEGAL ADVICE
Once a break clause has been triggered by a tenant, it is legally binding and cannot be reversed. Even if the circumstances change during a notice period and both parties agree to nullify the clause, there is no turning back.
Therefore, any tenant needs to think through their decision carefully before they act, and during the drafting process, it is crucial that legal advice is taken early on, so that both parties fully understand the gravity of the clause and the provisions it contains.
If you need support negotiating a break clause within a new or revised lease, or advice on triggering an existing break clause, then contact an experienced legal team for advice beforehand.
