COMMENT
BREAK CLAUSES
With many of the COVID-related
restrictions having now been li ed, many
organisations are beginning to adjust to life a er
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 dra” ing
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 o¦ ice 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 o¦ ice 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
12 DECEMBER/JANUARY 2022
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 o¦ ers 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 a” er 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 o¦ ice
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 timeconsuming
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 dra” ing
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.
Commercial Property Lawyer Karen Mason and Co-Founder of specialist real
estate law ƛ rm 1ewmanor Law, off ers advice on negotiating a break clause
that is appropriate for your business
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.”
ADVICE & OPINION