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Negotiating a new commercial lease and the importance of break clauses

A break clause is a contractual provision in a commercial lease which allows either the landlord or the tenant to terminate a lease early. Break clauses are one of the most significant landscapes during negotiations for grant of a new commercial lease.

From a tenant points of view, a break clause offers flexibility, depending on how the lease is drafted, allowing the tenant to assess their business needs and decide on whether to downsize or upsize their business considering business performance and market conditions.

At the other end of the spectrum, whilst a landlord will want to ensure a rental income for the duration of the lease term, a break clause is often required by a landlord where they wish to redevelop the property before the end of the lease term.

How a break clause works

The right to break may arise on one or more specified dates, or it may be exercisable at any time during the term on a rolling basis. The process usually involves the service of a break notice on the other party, notifying them of the intended break date in the form and on the date/s prescribed by the lease. A break clause may also include mandatory notice provisions on the service of the break notice.  In the absence of such provisions, the general notice provisions in the lease will apply.

Avoiding ambiguity

Careful drafting is required, specially where multiple parties together may comprise one party to the lease, and as such, the right must be drafted in such a way as to allow exercise of the break option, even if one party is unable to use the right: e.g. in the event that a party ceases to exist, or when a lease is assigned.

In the case of Linpac Mouldings Ltd and others v Aviva Life and Pensions UK Ltd [2010] EWCA Civ 395, the Court of Appeal emphasised the significance of an “unambiguously clear” drafting of break clauses when the court was asked to decide on whether a contractual right to break, as granted in the lease, was limited to the exercise of the original tenant (Linpac) and lost on assignment of the lease. In his judgment, Lewison J confirmed that a break notice could only be given by Linpac, as the original tenant, and that once Linpac assigned the lease, it ceased to be a tenant of any kind to exercise the right. The judgment highlights the importance of clear drafting of break clauses, as in this instance the right was drafted to be personal to Linpac, and was not therefore assignable. Such outcomes have alerted the commercial property lawyers of possible difficulties occurring from incoherently drafted break clauses in commercial leases. 

A break clause is often conditional upon a tenant’s compliance with certain conditions in order for a break notice to be effective.  The court will generally take a strict approach when considering conformity with the break clause conditions, as previously quoted by Lord Hoffman if the [notice] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

In a challenging and unpredictable commercial market, an option for an early break from the lease is considered one of the most valuable rights provided to a commercial tenant and it is therefore fundamental not to jeopardise the right by failing to fully adhere to the conditions of a break clause.

In a more recent case of Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 limited [2018] EWHC 1523 (Ch), the court has, however, departed from its stringent literal approach in interpreting the break clause conditions, and made a decision in favour of the tenant. The dispute arose from an ambiguity in different interpretations of the break condition between the tenant and the landlord in relation to a break clause which required the tenant to yield up the property “in accordance with Clause 11 and with full vacant possession”. The issue stems from ambiguous drafting of Clause 11 which related to tenant’s reinstatement obligations.

Generally, in accordance with the previous case law, such a clause would be absolute and binding. However, in this instance, whilst the court considered the “natural and ordinary meaning” of the break clause in dispute, it gave weight to an interpretation that was more consistent with common sense, and ruled that the clause imposed only a single condition to yield up with vacant possession. The court concluded that Clause 11 was not a suitable pre-condition for the exercise of the break option.

Although the court’s sensible approach will be welcomed by the tenants, conditional break clauses will continue to create problems in the future if not diligently drafted.

Overall, the courts deal with a considerable number of cases relating to landlord and tenant disputes over the exercise of break clauses. It is therefore necessary to pay special attention to the drafting of a break clause before finalising the lease. The key issues to be considered carefully are:

  • Unambiguous drafting of the break clause to enable the right to be validly exercised
  • Compliance with the correct procedure and the date for service of the break notice
  • Compliance with any condition to the break clause.

Disputed break clauses can be costly and litigious, but these kinds of problems can often be avoided at the time of negotiation of a new lease.

If you have any enquiries about matters discussed in this article, please do not hesitate to contact our commercial property team on 0208 951 6989 or 0207 016 9333.

This article does not constitute legal advice and it is intended as general guidance only.