Break clauses in commercial leases are commonplace. Still, it doesn’t stop alarm bells ringing for both a landlord or business tenant entering into a commercial lease arrangement for the first time. Below we look at what break clauses are, how these work and how to approach them.
What is a break clause in a commercial lease?
A break clause, also known as an option to determine, is a contractual provision providing both parties with a pre-defined mechanism to terminate the agreement early if certain conditions are met. This is a way of offering either party the flexibility to get out of their contractual obligations early, if their circumstances change, such as during an economic downturn.
For example, Company X enters into a 10-year commercial lease with a landlord for retail premises in 2022. The lease includes an agreed break clause whereby either party can terminate the tenancy at any point, on 6 months notice, after the first 3 years. In 2026, Company X experiences financial problems and needs to downscale to stay in business. The landlord is notified of the company’s intention to exercise the break clause and is given the required 6 months’ notice on 1st May 2026. The commercial lease agreement will then formally come to an end on 1st November 2026.
Alternatively, a break clause could provide a specified agreed date, possibly the mid-way point of the lease term, at which point either party can end the lease on the provision of notice.
How should a break clause in a commercial lease be approached?
Before formally entering into a commercial lease agreement, it is important for both parties to carefully consider the contractual provisions by which they will be bound. This is a matter of negotiation between the parties, including the lease term, and whether or not some flexibility should be factored into how long that term will last. This, of course, will depend on the circumstances of the respective parties, for example, a small start-up may be concerned about its longevity and will be looking to include an option to determine in case they hit hard times. Equally, a landlord may be thinking about marketing the premises tenant-free in a few years, or using the premises themselves, or would like the ability to easily remove any troublesome tenant.
However, there are some important considerations when including a break clause, not least the exact wording used to define its scope. The clause must be clear and transparent, and not open to interpretation, in this way minimising the possibility of any potential dispute that may arise over whether a break clause can be exercised and, if so, when the lease agreement will be treated as coming to an end. It is not uncommon for disputes to arise over the circumstances in which a poorly-drafted break clause can be exercised or exactly when a lease will terminate following the exercise of the clause and, as such, the extent of any remaining respective contractual obligations.
By seeking legal advice before signing a commercial lease agreement, steps can be taken to clarify the meaning of any break clause, with suitable amendments made to protect each parties’ interests.
Legal disclaimer
The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.
