Why a break clause is important in a commercial lease

A break clause is a contractual provision in a commercial lease which allows either the landlord or the tenant to terminate early. Break clauses are often one of the most important negotiation issues in the grant of a new commercial lease.

Why tenants want break clauses

From a tenant points of view, a break clause offers flexibility, depending on how the lease is drafted, allowing the tenant to assess their business needs and decide on whether to downsize or upsize their business considering business performance and market conditions.

At the other end of the spectrum, whilst a landlord will want to ensure a rental income for the duration of the lease term, a break clause is often required by a landlord where they wish to redevelop the property before the end of the lease term.

How a break clause works

The right to break may arise on one or more specified dates, or, less commonly, may be exercisable at any time during the term on a rolling basis. The process usually involves the service of a formal break notice on the other party, notifying them of the intended break date in the form and on the date/s prescribed by the lease. A break clause may also include mandatory notice provisions on the service of the break notice.  In the absence of such provisions, the general notice provisions in the lease will apply.

Problems and disputes over lease break clauses

Careful drafting is required, specially where multiple parties together may comprise one party to the lease, and as such, the right must be drafted in such a way as to allow exercise of the break option, even if one party is unable to use the right: e.g. in the event that a party ceases to exist, or when a lease is assigned.

In a challenging and unpredictable commercial market, an option for an early break from the lease is considered one of the most valuable rights provided to a commercial tenant and it is therefore fundamental not to jeopardise the right by failing to fully adhere to the conditions of a break clause.

In a more recent case of Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 limited [2018] EWHC 1523 (Ch), the court has, however, departed from its stringent literal approach in interpreting the break clause conditions, and made a decision in favour of the tenant. The dispute arose from an ambiguity in different interpretations of the break condition between the tenant and the landlord in relation to a break clause which required the tenant to yield up the property “in accordance with Clause 11 and with full vacant possession”. The issue stems from ambiguous drafting of Clause 11 which related to tenant’s reinstatement obligations.

Overall, the courts deal with a considerable number of cases relating to landlord and tenant disputes over the exercise of break clauses. It is therefore necessary to pay special attention to the drafting of a break clause before finalising the lease. The key issues to be considered carefully are:

• Unambiguous drafting of the break clause to enable the right to be validly exercised
• Compliance with the correct procedure and the date for service of the break notice
• Compliance with any condition to the break clause.

Disputed break clauses can be costly and litigious, but these kinds of problems can often be avoided at the time of negotiation of a new lease.