Lease heads of terms
Senior real estate associate, Andrew Stokes, provides guidance for landlords and tenants on the key terms to consider when negotiating lease head of terms.Read more
In today’s challenging economic climate, an ever-increasing number of commercial tenants are seeking ways to end their leases.
One way in which a tenant may do this is through exercising a break option, should the tenant have one, within their commercial lease.
This is not, however, as simple or straightforward as a tenant often imagines. Consequently, this article explores break options and the key issues to be aware of when exercising them.
A break option, if included in a commercial lease, allows the landlord, tenant or both parties to serve notice to terminate the lease before the contractual end date. The right to ‘break’ from the lease can take effect at a specified date or may be exercised at any time during the term, depending on the exact provisions of the break option.
A break option within a commercial lease is likely to specify the precise form in which the notice must be served and how such service should be affected. Any requirements as to timings must be strictly adhered to, for instance, it is common that a notice to break the lease must be served a minimum number of months before the break date. It is also usual for the break option to specify how the break notice must be served, for example by hand, first-class post or recorded delivery.
Many break options can only be exercised on the basis that certain pre-conditions are met. A common pre-condition is that the tenant must have observed and performed all of its obligations prescribed by the lease. If this is the case then the tenant must ensure that it has fully complied with all the tenant’s covenants within the lease, however onerous these may be.
Another common pre-condition is that the tenant must have paid all rents due under the lease up to the break date. Depending on the terms of the lease, ‘rents’ may include not only the rent itself but other payments too, such as buildings insurance premiums and service charge payments.
Care must be taken to ensure that all payments are made in full and on time. If any payment has been late in the past then the tenant should ensure that the relevant amount of interest is paid, as per any such requirement to do so under the lease, whether or not the landlord has demanded such payment.
Many break options also require a tenant to give vacant possession of the premises on the break date. This means the premises must be returned to the landlord in accordance with the terms of the lease.
The tenant must ensure, therefore, that there are no tenant’s fixtures or fittings remaining on the premises, nor any continuing subleases. On the break date, the landlord must have full control and use of the premises.
The decision to exercise a break option should be made in advance and expert legal advice should be sought.
Failure to comply with any timings, service requirements and/or pre-conditions will render the break option ineffective and as a result, termination of the lease will be invalid.
In such circumstances, the tenant would either have to remain in occupation of the premises until the next opportunity arises to break the lease (as provided for under the terms of the break option, if applicable) or else the end of the term.
Alternatively, the tenant could endeavour to agree to a surrender of the lease with the landlord (usually on payment of a sum of money).
If the lease allows then the tenant could also try to assign or sublet its interest in the lease to a third party.
Obviously, when market conditions are challenging, none of the above alternatives is likely to be feasible options for a tenant, hence the need to strictly comply with terms of the break option in the first instance.
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