Break clauses in leases - why it's easy to get it wrong

A lease break clause is a contractual provision that, where included in a long commercial lease (many leases of 10 years and up will include a break clause typically after 5 years) which allows either the landlord or tenant to terminate the lease early. It is more common for tenants to seek to negotiate a break clause than landlords.

The legal validity of a break clause is quite commonly contested, particularly where a landlord alleges there are dilapidations and/or where the tenant has made a procedural or technical error in the formalities.

Our Property Litigation solicitors advise tenants and also landlord clients on break clause terms in commercial leases, exercising a break clause correctly and options where there is a dispute.

How Break Clauses Work

A break clause is typically triggered by a specific event, such as a fixed date or the occurrence of a particular circumstance. Once the trigger event occurs, the party wishing to terminate must give the other party a specified period of notice. Often, break clauses are subject to conditions precedent, which must be fulfilled before the lease can be terminated. These conditions might include:

• Payment of all outstanding rent and other charges.

• Strict compliance with all covenants and obligations under the lease and the terms of the lease about timing for service of a break clause notice, form of notice and how it must be served.

• Returning the premises in good condition.

• Obtaining any necessary consents from third parties.

• Third-Party Consents, if the break clause is subject to the consent of a third party (e.g., a superior landlord or a lender).

How to avoid mistakes

• Adhere strictly to the lease's specified break date, notice period and form of notice - check the lease terms well in advance and ensure you fully comply. A small technical irregularity can mean the break clause is ineffective.

• Be fully compliant with lease conditions - fulfill all conditions precedent, such as paying rent, rates and insurance. Complete any required repairs or maintenance work, adhering to the lease's standards.

How dilapidations cause problems with break clauses

Disputes may arise over the interpretation of specific terms in the lease, such as the definition of "good repair" or the extent of the tenant's repair obligations. More generally, a Landlord may claim that a break clause is not operative due to a dispute about what constitutes reasonable wear and tear, changes made to the premises by the tenant and/or the valuation of repairs. The lease may specify a timeframe for completing repairs to ensure the break clause is operative and disputes can arise if the tenant fails to meet these deadlines.

How to resolve a break clause dispute

Options which we regularly consider with clients include :-

• Negotiation - attempt to resolve the dispute through negotiation and compromise.

• Mediation - can be a cost-effective and efficient way to resolve disputes.

• Expert determination - an independent expert can be appointed to determine the extent of the dilapidations and the cost of repairs.

• Litigation - if negotiations and alternative dispute resolution fail, the parties may resort to litigation.

How we can help

Given the potential risks, it's crucial to consult with our Property Litigation solicitors before exercising a break clause. Our team can:

• Analyse the lease's terms well in advance of the break clause notice date - to identify potential pitfalls, conduct regular inspections of the property to identify and address potential issues and maintain accurate records of repairs, maintenance, inspections and formally communicate with the Landlord regularly about the condition of the property.

• Assist in drafting and serving the break notice correctly.

• Advise on compliance with conditions precedent and post-break obligations.

• Represent you in any disputes arising from the break clause.