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What is a break clause?

•    A break clause is a clause in a fixed-term lease allowing either you or your landlord to end the lease early.
•    The break is exercised by notice and, when the notice expires, the lease comes to an end.  However, where the landlord breaks the lease, there is legislation in place that may allow your business to remain in the property after the lease has ended.
•    Depending on how your lease has been drafted, the right to break the lease may:
arise on one or more specified dates, e.g. on the third and sixth anniversaries of the start of the lease; or
be exercisable at any time during the term of the lease on a rolling basis, e.g. at any time in the first 5 years.
•    A break clause may only be exercised if any conditions attached to it have been satisfied (for example, that all rent has been paid up to date and providing vacant possession).  The courts will require strict compliance of these conditions and failure to meet all requirements can mean that the lease will continue.
•    If a break notice is not served properly or if the conditions in the break clause are not complied with in full then the lease will not end and you will continue to be liable for rent and all other obligations under the lease.

Practical issues for a tenant to consider when exercising a break clause

•    Once a break notice has been served, it cannot be withdrawn without the other party’s consent, so make sure that you are certain that you intend to end the lease.
•    Make sure that you serve the break notice in good time; if you miss the date for service you will lose your right to end the lease.  For example, if the lease started on 1st February 2010 and you have the right to break the lease at the third anniversary on 6 months notice, then the notice must be served in July 2012 and no later than 31st July.
•    Also make sure that you serve the break notice in the right way and in the required format if there is one.   Most leases have a general clause specifying how notices are to be served, e.g. by recorded delivery post (service by email is not usually permitted).  If you do not serve the notice in the way specified by the lease then the notice will be invalid and you will lose your right to end the lease.  Occasionally the lease will specify a particular form of notice or that particular information should be included in it so make sure you follow these rules.
•    Keep evidence of the method of posting or delivery of the notice.  If there are no service provisions in the lease, you could request that your landlord acknowledges receipt or even hand deliver and keep a record of the day and time of delivery.
•    If the notice is being served by an agent, make sure your landlord is aware of the existence of the agency and its authority.
•    Make sure you comply with all the relevant requirements in the break clause and keep evidence of your compliance to help protect your position.  Almost all break clauses require that all rent is paid up to the date the break notice expires but many also are conditional upon there being no other breach of the lease at that date.   Therefore:
  • Consider carrying out a compliance audit with your surveyor’s advice before serving the break notice.  You can then take steps to remedy any breaches to ensure compliance with its covenants.
  • Pay any outstanding sums due, even if these are in dispute.  Payment can be made on a “without prejudice” basis and the matter disputed later. 
  • Rent is usually payable quarterly in advance on “quarter days” whereas the break date will usually fall in between these quarter days so that you pay for the whole quarter even though you will be leaving before the next quarter day. You might therefore be tempted to apportion the final rent payment so that you only pay rent up to the day you leave.  However, you should not do this unless the break clause allows it or the landlord agrees in writing.  The safe way is to pay the whole quarter’s rent when due and then claim a refund from the landlord after the lease has ended.
  • Check whether default interest may be due on past arrears.  Was all rent and other money due to the landlord always paid on time?  If not, then interest may be payable and, unless you have received a demand from your landlord, you may have difficulty knowing precisely how much is due.  Therefore, you should try to estimate the amount due and err on the safe side.  The cost of doing so is likely to be far less than the cost of remaining bound under the lease.
  • Be careful of paying by cheque.   Pay all that is due by whatever method is stated in the lease or in cash or bank transfer of cleared funds.   Cheques are regarded as a promise to pay, not actual payment although they may be acceptable if the landlord has always accepted payment by cheque.
  • Ask your landlord for confirmation of the steps you need to take to comply with any conditions.  You could ask your landlord to prepare a schedule of dilapidations in relation to any repair works.  A schedule of dilapidations is a list of items that are in need of repair and for which the landlord holds you responsible under the lease.  However, bear in mind that a schedule of dilapidations is not an independent list of repairs.   It is the landlord’s list and you may disagree either that the repair is necessary or with the estimated cost of repair.
  • If you agree 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.
  • If there are potential breaches of covenant, consider asking your landlord to accept the break notice on payment of a fixed sum as damages for any outstanding breaches of covenant.
  • Ensure that any waiver of a condition by your landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
More information
If you have any queries about the content of this checklist, please contact David Heys on 0116 212 1000.