If you are considering a relocation and need to exercise a break clause in your lease, it is important to plan well in advance and understand your obligations.  Our handy guide sets out what you need to plan for, what obligations you might have and where you may be able to negotiate with your landlord.

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If you want to take advantage of a break clause in your lease to relocate or give up your space, it’s important to know what you need to do and your obligations.

The first step for exercising a break clause is to get legal advice. Break options are not all the same, and new case law can fundamentally change how the wording is interpreted, so you’ll need a specialist to help you.

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What is a break clause?

A break clause is an option to terminate the lease at an agreed point in time. The break will stipulate who it applies to and any conditions that need to be fulfilled to be exercised successfully.

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Understanding break clause conditions

Break clauses will often have conditions attached. If these conditions aren’t followed, you risk invalidating your option to exit the lease.

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Some typical examples of break conditions are:

Tenant must give vacant possession

Until a few years ago, this was a standard condition, so it is still included in many leases. The original intention for including this condition was that the tenant must no longer be in occupation, but certain case law has caused confusion.

Disputes have arisen where tenants have left items behind or continued to visit the property to finish works.

You may need to completely strip out any tenant fit out works such as partitioning prior to a break date to avoid any risk of this condition not being fulfilled.  In this case, you may need to allow additional time and start the relocation process sooner than anticipated.

Tenant must pay all rents due  

Check the lease to clarify the meaning of “rents”, but it would usually include principal rent, service charge, insurance, VAT and interest.

Check whether interest has or should have been charged on any late payments. For example, a change in bank accounts that delayed a historic payment may have incurred an interest charge.  Even if that interest charge had not been demanded at the time, the landlord  could use it to invalidate the break.

 If the break date falls between quarter days, the full quarters rent should be paid, not an apportionment.

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Timing

A break clause will usually stipulate a minimum notice period to be given in writing. This can be between six and 12 months. It is critical to plan because if you miss the window to exercise the break, you will be bound by the lease for the remainder of its term.  

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Penalty payment 

You may be required to pay a penalty or premium to exercise the break clause, and typically that payment falls due on the break date.  Make sure you have funds available to pay in full if this is a condition.

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Compliance with tenant's covenants

If the lease contains an absolute requirement for compliance with all covenants, you may be prevented from exercising the break if there is an existing or ongoing breach, no matter how trivial.   

This will likely be qualified with the word "materially", "substantially" or "reasonably" which may soften the impact.  However, this is not simply a question of what might be fair and reasonable in the circumstances.  Emphasis will be on the duration of any breach, recurrent breaches and severity of non-compliance over the lease term.  

Professional advice is important. It may be prudent to negotiate with your landlord well in advance to agree to a predetermined settlement. This will help avoid any ambiguity and risk of future litigation and potential non-compliance with this break condition.

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Practical considerations

Aside from understanding the wording and requirements of the break clause, there are practical considerations.

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Dilapidations

Professional advice from a building surveyor is recommended for dilapidations.  They can review the lease, inspect your premises and advise on the best strategy and anticipated liability.

Aside from the break conditions, it may be prudent to carry out additional works to comply with the repairing obligations under the lease. However, if the current condition does not have a detrimental effect on the value of the reversion (if, for example, the property was due to be redeveloped by the landlord), repair works may not be necessary.

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Handover

Make sure keys are handed back, and you have clear photo evidence of the condition. Even better, carry out a joint inspection with the landlord.  Final bills should be requested and promptly paid.

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Landlord negotiations

Regardless of contractual position, a landlord may be willing to compromise, waive requirements or agree to financial settlement in lieu of compliance. Early dialogue with the landlord can open up options.  

For example, a good quality tenant fit-out can be beneficial to landlords, enabling the space to be marketed to let on a “plug and play” basis making it quicker and easier for another company to occupy. In this scenario, it may be worth talking to your landlord well in advance. 

Planning and timing

Planning well in advance isn’t only key to making sure that all options remain open but that relocation is as smooth as possible without leaving you out of pocket.

Make sure you engage professional advisers as early as possible, so you are in the best position to limit liability and overcome any obstacles.

Start your search for new premises early and consider whether you need to secure new office space before serving notice to break the existing lease.  

When signing a new lease, ensure your advisors limit your liability as far as possible on any break clause.

Landlords should not be able to frustrate the break clause without very good reason. Having limited conditionality on the break still means you are liable for the obligations under the lease; it should simply allow you to end the lease at an agreed point in time.