Tenants and Landlords beware – Caution should be exercised when invoking a break clauses

November 25, 2013

In an unsettled market reducing one’s overheads has become a key performance indicator for commercial tenants. It is therefore not unsurprising that we have been approached by many clients, both tenants and landlords, to consider the implications of the exercise of break options contained within commercial leases. The initial attraction in a falling market is obvious, a commercial tenant may be able to negotiate a reduced rent and/or rent free period and relocate to more modern premises.

Both landlords and tenants should approach the exercise of a break option with caution. Tenants must ensure that they have complied with all of the pre-conditions relevant to the same to prevent being locked into the lease for the remainder of its term. Equally, landlords should conduct their own due diligence. They may be able to retain a tenant for the remainder of the term of the lease if the tenant has been complacent in its approach to the break option. In a difficult market this could see a landlord secure rents for a space which may have become otherwise unoccupied.

The general starting point is that break options can be exercised by the tenant subject to the tenant’s prior compliance with any pre-conditions stipulated by the lease. Non-compliance with the preconditions may render the break option invalid.

We have seen many different forms of pre-condition. It is not unusual to see a pre-condition that the tenant must have complied with the covenants and conditions stipulated in the lease up to the date of the break. Other examples include full payment of the rents, the delivery of vacant possession and the return of keys and security passes. Some pre-conditions are definite while others can be qualified by words such as ‘reasonable’ or ‘material’. No matter how trivial the pre-condition the tenant should ensure that it complies with the same. In Bairstow Eves (Securities) Limited v Ripley [1992] 2 EGLR 47 the Court concluded that if performance of a covenant is required as a pre-condition to the exercise of the break option then the Court will look for absolute performance and not merely substantial performance, unless the lease states otherwise.

The most common ground where we have seen tenants fall foul of pre-conditions in the current market is when they have failed to decorate, repair or yield up the premises in repair at the break date in accordance with the terms of the lease. The tenant in these circumstances is often then faced with a claim for the dilapidation of the premises together with a claim for the unpaid part of the rents relating to the unexpired term of the lease.

Given the complexities involved and the catastrophic cost consequences of being tied into a further lengthy term in the lease, tenants are encouraged to contact these offices to discuss their possible exit from commercial premises. Equally, landlords are also encouraged to contact these offices when they suspect that their tenant wishes to exercise a break option.

Aaron has acted in several high matters for both landlords and tenants in recent years and has developed an in-depth knowledge of the relevant principles applicable to the same.

Please note: The content of this article is for information purposes only and further advice should be sought from a professional advisor before any action is taken.