Covid-19 and Commercial Lease Break Clauses – What tenants need to know

Covid-19 and Commercial Lease Break Clauses – What tenants need to know

To break or not to break: this is the question many commercial tenants will be asking themselves during these unprecedented times.

Forced government closures, lay-offs, and remote working has led to many businesses finding themselves with empty commercial premises. Whilst these measures are temporary, the true economic effect of this pandemic is likely to be felt for months, if not years, to come.

Consequently, many commercial tenants will now be looking at ways to reduce their overheads and improve their cashflow. As a result, many will seek to dispose of unnecessary commercial premises which are now surplus to requirements and some will achieve this by exercising the break clauses set out in their leases.

What is a Break Clause?

A break clause is a negotiated right which enables a tenant and/or landlord to “break” the contractual term of a lease, which would result in the lease coming to an end before its natural expiry date. For example, a landlord may grant a lease to a tenant for a contractual term of 10 years, subject to a tenant-exercisable break clause permitting the tenant to bring the lease to an end on the fifth anniversary of the term – five years prior to the date it would otherwise expire by effluxion of time.

An option to break is not an implied right and must be expressly agreed between the parties. A well-drafted commercial lease will document who, when, and how the break right may be exercised.

Accordingly, all commercial tenants should now undertake a thorough review of the terms of their leases and assess what options are available to them. Having considered their rights, a tenant seeking to exercise their right to break should also take into account the following:

The “Break Date”:

It is important to establish the Break Date. This is the date that the lease will come to an end and it will dictate how and when certain actions must be taken.  

Typically, a right to break will be expressed either as a fixed or rolling break option.

Where a fixed break option has been agreed, a party may have one or multiple opportunities to bring the lease to an end on a particular date, or dates, throughout the term. Fixed break dates can be expressly stated (e.g. 1st July 2020, 1st July 2021 etc.) or calculated by reference to a period of time (e.g. the third, fifth, and eighth anniversaries of the term etc.).

Where a rolling break option has been agreed, the exercising party may be permitted to break the lease at any time during the term, or any time after a particular date or event, provided that they have given the other party the requisite notice.  

The “Break Notice” – Form, Content and Method of Service:

It is usually a condition of the lease that for the break to take effect the tenant must have served written notice on the landlord (usually 3 – 6 months in advance of the break date) and for such notice to be sent by first class pre-paid post or hand delivered and left at landlord’s address for service. The notice should also refer to the lease and state the date that the tenant intends to bring the lease to an end.

The notice requirements contained in the lease should always be checked carefully, as failure to comply with them may invalidate the notice. Consequently, the opportunity to exercise the break may be lost if there is insufficient time to reserve the notice before the break option expires.

Condition Precedents:

In addition to serving the notice, a tenant should consider whether there are any additional pre-conditions which must be satisfied before the lease is determined. For example, it is often a requirement for (i) all rents and other sums due before the break date to be paid in full; (ii) that there must be no subsisting breaches of any tenant covenants; and (iii) there must be no continuing sub-tenancies.

Again, failure to strictly adhere to all condition precedents will invalidate the break.

Recovery of Rent:

It is also worth noting that, unless the lease expressly states otherwise, any annual rent paid in advance for a period beyond the break date is non-recoverable by the tenant.

Returning the Property:

For a break notice to take effect, the tenant must have left the property and returned the keys to the landlord on or before the break date. Typically, the lease will also require that the property is handed back in the condition required by the tenant’s repairing and redecoration covenants set out in the lease.  

Furthermore, where a lease requires the property to be returned with vacant possession the tenant must take care to remove all of its belongings, together with any alterations and additions it has made to the property. Leaving behind items, without the landlord’s consent, may give rise to a dispute over whether or not the tenant has truly vacated the property or in fact has remained in occupation of it. 

Lastly, if a tenant fails to return the property in the condition required by the lease, it is likely the landlord will bring a dilapidations claim and pursue the tenant for the costs it incurs as a result of remedying the tenant’s default.

Closure of the Leasehold Title:

A tenant’s responsibility may not end with the determination of the lease; if the lease was registered with HM Land Registry, the leasehold title will need to be closed. Again the lease should be consulted to ascertain whether the landlord or the tenant is responsible for closing the title.

In addition to the points raised above, tenants face further challenges in complying with the lease requirements with lockdown and social distancing in place. This may make it difficult for a tenant and its contractors to attend the property to undertake necessary repair works and/or to remove the tenant’s belonging from the premises so that vacant possession can be achieved.

How Blaser Mills Law can help

Failure to fully consider these legal and commercial factors may result in unintended outcomes and adverse financial implications for the tenant and its business. Therefore, it is always advisable for a tenant, seeking to exercise its right to break, to obtain specific legal advice from a specialist who can help navigate these issues and any others that may crop up during the break process.

For further information regarding how Blaser Mills Law can assist you with the review of your lease or exercising your break rights, please contact Joseph Florish on 01494 932 612 or at jsf@blasermills.co.uk.  

Disclaimer: The contents of this article has been provided for general information only and does not constitute actual legal advice. Specific legal advice should be sought in all cases.