A break clause is normally understood to mean a clause in a commercial lease allowing either or both parties to the lease to break and end the lease term prematurely. From the Landlord's perspective the break clause is especially useful if it intends to redevelop the site. It enables the rental to receive a rental right up to the time when redevelopment of the site is physically possible and after all planning and other matters have been resolved. From the Tenant's perspective it is particularly useful in avoiding excessive increases in rent at times of review. It will also free a Tenant from a lease of the premises that have grown either too small or too costly.
Rent clauses are usually drafted so as to operate in two different ways. First, the entitlement to serve a break clause may be triggered by simply reaching a specific date or dates. The clause will therefore indicate that the break clause will be triggered upon a giving of notice at specific dates, such as the end of the fifth and tenth years of the lease term. Secondly, the break clause entitlement may possibly come into operation upon the happening of a specified event, such as the Landlord receiving a Planning Consent from the Local Planning Authority.
The timing of the break notice is critical, as the Courts have taken the view that time will be of the essence unless the break clause provides otherwise. If the Tenant serves a break notice can it be withdrawn? The answer is that the Tenant cannot unilaterally withdraw it. However both Landlord and Tenant can mutually agree to it being withdrawn, but that will then be deemed to be the creation of a new tenancy. The fact that a new lease has been created can then in itself create a problem especially for the Landlord. For example the new implied Lease will not automatically be contracted out of the Landlord and Tenant Act 1954 even if the original lease was contracted out. In addition the Tenant's guarantor will have been released without having to guarantee the new lease.
In the current economic climate break clauses have an important role to play. If you are either a Landlord or a Tenant seeking to operate a break clause you should take legal advice.
For further information please contact a member of the Commercial Property Team.