An important part of our role as solicitors is to break down legal jargon so that our clients fully understand the terms of the agreement they are entering into. A common example of jargon in property law is “the break clause”
Depending on the length and nature of a commercial lease, it may be appropriate to include a clause in the lease which allows it to be terminated by either the landlord or tenant before the lease term expires. This is known as the break clause or option to terminate.
Break clauses can differ substantially in length, specificity and complexity from one lease to the next, and a number of factors may influence this. Example of such factors include the relationship between the tenant and landlord, the nature of their negotiations, the length of the lease, and any works that the tenant may carry out to the property prior to or during occupation.
It is important to remember that the absence of a break clause from a lease does not prevent the parties from mutually agreeing to terminate a lease before the expiry of the contractual term. Therefore the inclusion of a break clause in the lease is at the discretion of the parties and is intended to make the process of early termination as smooth, simple and non-contentious as possible.
To this end, best practise suggests that the ideal break clause permits either party to terminate the lease upon serving requisite notice, and vacating the property on or before the intended date of termination of the lease.
However, it is not uncommon for landlords and tenants to negotiate on the contents of the break clause, and it is often subject to conditions.
If you’re struggling to decide whether it’s worthwhile including a break clause in your lease, it may be useful to consider the following questions:
1. Who will be able to exercise the break clause? (for example, both parties, or just one party. Will it be available to successors in title if the lease is assigned to a third party?);
2. When will the clause be exercisable and is there a deadline? (for example, can it be exercised at any time during the lease term or only within a specific time frame? Will the exercising party have to serve notice by a certain date?);
3. Will there be any conditions attached to the exercise of the clause? (for example, all rent must be paid up-to-date on the date of termination in order for termination of the lease to be valid);
4. Will there be a set process in place which will render any termination invalid if not followed? (for example, must serve 6-months written notice on the other party specifying the intended date of termination before the 3rd anniversary of the commencement of the lease term); and
5. Will there be any ramifications for exercising the break clause? (for example, the rent saved by the Tenant during a rent-free period in year 1 will be payable to the Landlord if the break clause is exercised before the 3rd anniversary of the commencement of the leasee term).
We recommend consultation with a solicitor before entering into a lease subject to a break clause. You should be comfortable that you understand how the clause will work in practise, and your solicitor will check that any conditions attached to a break clause do not render the clause inoperable. First North Law can advise on all aspects of your leasehold enquiries, please do get in touch to find out more.