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Commercial Property podcast – navigating a break clause

31 March 2022 |

Experts Julian Pyrke and Jon Wilson explain how commercial tenants and landlords should navigate a break clause in a property lease.  See below for further practical considerations and top tips.

 

 

Top 12 practical issues for tenants to consider when exercising a break clause 

  1. Once a notice exercising the break clause has been served, it cannot be withdrawn. Therefore, the tenant must be sure that they want to end the lease early before serving the notice triggering the break right.
  2. Tenants should comply with all the relevant requirements in the break clause and keep evidence of their compliance to help protect their position.
  3. Serve the break notice in good time and strictly in accordance with the terms of the lease – the lease may contain provisions relating to serving the break notice that are not in the break clause itself. If the lease says 6 months’ written notice you must give a full 6 months in accordance with the notice and service provisions of the lease. Do not miss your date!
  4. Pay any outstanding sums due, even if these are in dispute. Payment can be made on a “without prejudice” basis and discussed later. Again, this is particularly important where such payment is a condition of the break clause.
  5. The tenant might not be aware of all the money it owes. The lease may oblige the tenant to pay interest in respect of late payments, so check if any such interest is due in respect of arrears in the past. The tenant may owe interest on historic arrears, even if the arrears have been cleared and the landlord has not requested the interest. Unless the tenant has received a demand for such interest, it may have difficulty knowing precisely how much interest is due, but the landlord has no obligation to tell the tenant how much interest is owed. The tenant should try to estimate the amount due and err on the safe side when paying. The cost of over-estimating the amount due for interest is likely to be far less than the cost of remaining bound under the lease. The exact amounts owed can be settled later.
  6. Ask the landlord for confirmation of the steps required to comply with any conditions in the break clause. In particular, the tenant may want to be sure that it has complied with its repairing obligations under the lease. In order to do this, the tenant may ask the landlord to prepare a list of items that are in need of repair, and for which the tenant is responsible under the lease. This list is known as a schedule of dilapidations.
  7. If a tenant agrees to carry out works to the property before the break date, be careful to ensure that the works are completed and vacant possession is given by the break date.
  8. Remember that there may be general obligations that apply at the end of the term of the lease, which will need to be complied with before the break date. For example, the lease may require the tenant to remove signage, reinstate alterations and redecorate the property. You should also check supplemental documents, such as any licences granted for works to the property, in case these contain obligations that are relevant to the break.
  9. Consider asking the landlord to accept the break notice on payment of an agreed amount as liquidated damages for any outstanding breaches of covenant. Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties.
  10. Ensure that any waiver of a break clause condition by the landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
  11. Do not assume that the tenant is only obliged to pay an apportioned part of sums due under the lease, for the period up to the break date. The lease may require full payment.
  12. If the tenant is obliged to pay any sums in advance, such as rent, service charge or insurance rent, check to see if the landlord is obliged to refund any part of those sums that can be attributed to the time after the lease ends. The tenant will not normally be entitled to a refund of rent paid in advance, unless there is an express provision in the lease to the contrary.

To contact Julian Pyrke or Jon Wilson please call 0117 906 9400 or email hello@gl.law 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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