Break Clauses in Commercial Leases
Break clauses are an important part of the negotiations for the grant of commercial leases as it allows flexibility for both parties in the future. However tenants must be careful as to what conditions they agree to be attached to any break clause. You should always discuss the draft terms with your solicitor before finalising heads of terms.
Break clauses are an important part of the negotiations for the grant of commercial leases as it allows flexibility for both parties in the future.
Failure to adhere to the conditions of the break may invalidate the attempt to break the lease. The most common condition that landlords insist upon is that the tenant gives vacant possession which generally means giving up occupation of the property, emptying the property of the tenants possessions and giving the keys back to the landlord. However this is not as simple as it seems. Attempted exercises by tenants of break clauses continue to be challenged by landlords before the courts.
The results of recent cases stress the need for great care when negotiating the terms of the break. The vacant possession condition may cause problems for example where there may be repair work running past the termination date or if there are security persons or employees still on site. In these situations, it is likely that vacant possession will not be satisfied. In a Court of Appeal case Ibrend Estates BV v NYK Logistics (UK) Limited  it was held that vacant possession was not given when workmen remained on site 4 days after the termination date as the landlord had not received unimpeded enjoyment of the property. The only safe course is to stop all the tenants works and security arrangements and to hand back the keys to the landlord in good time.
The Lease Code recommends that the only precondition to the tenants exercising a break should be that they are up to date with rent, give up occupation and leave behind no continuing sub-leases. Disputes about the state of the premises or what has been left behind should be settled later.
In respect of rent being paid up to date, it may be the case that the tenant will be required to pay for advance rent where the break date falls between the quarter days when rent is due. So in this instance, rent must be paid notwithstanding that part of the rent relates to a period after the break date. In a recent Court of Appeal judgement, Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited  the question was whether the tenant could obtain a refund for the period of rent paid in advance after the break date if there was no express term in the lease providing for a refund. The Court of Appeal rejected the tenants argument that there was an implied term entitling the tenant to a repayment. The tenant is not entitled to repayment of any rent paid in advance for the period after the break unless there is such a clause entitling the tenant to a repayment. Tenants will now need to be much more cautious. Therefore, it is very important when agreeing the terms of the lease that your solicitor ensures that there is a clause requiring the landlord to repay any advance rent. Care and attention should be given when drafting and considering break clauses in commercial leases.
Whether you are a landlord or tenant I will be happy to advise you in relation to break clauses as well as other aspects of commercial leases. For further information please contact me at [email protected]
For more information please contact Christina Antonas at [email protected]