Breaking up is hard to do
If there is one area of commercial landlord and tenant law which will ensure that property lawyers will grit their teeth, it is tenant-only break clauses. When there is a dip in the economy, the tenant’s ability to terminate a lease may be problematic because the landlord wishes to retain the landlord and tenant relationship and will latch onto any error made by the tenant in exercising the break.
The flow of disputed break clause cases appearing in court shows no sign of abatement. There is barely any standardisation in the wording of such clauses, thus allowing landlords to insert apparently innocuous wording that contains traps for the unsuspecting tenant. Despite the increased focus of case law on break clauses, it is often too late to be used by tenants already ensnared by the landlord.
A tenant-only break clause gives the tenant the best of both worlds: termination of the lease if it decides to exercise the break option, or stay for the remainder of the term without utilising the break option. Landlords generally agree to break clauses in return for more favourable terms from the tenant at the outset of the lease, for example an initial higher level of rent.
Inevitably, a landlord will make the break clause difficult to exercise and will try to include onerous conditions which are extremely difficult to comply with. When first negotiating the lease, a well-advised tenant will try to moderate those conditions. However, delays caused by hard-fought negotiations sometimes cause tenants to accept onerous break conditions simply to get into occupation and complete the lease.
In an economic downturn, or where there are property market changes in favour of tenants, the tenant may choose to operate the break because it is paying a higher-than-average rent. Under these circumstances, break clauses can be a lifeline for tenants, but the landlord would be unlikely to let go of a good tenant without strong resistance and detailed scrutiny of the tenant’s break notice and conditions. The consequences for failing to properly exercise the break will have disastrous financial consequences for the tenant. The tenant will be forced to stay in the same premises, paying a high rent until it can exercise the next break (if there is one) or remain in the premises until lease termination.
There are three practical tips for a tenant:
- If the tenant wants to avoid costly and prolonged litigation as well as the possible loss of a valuable right to break, then it must adhere to all the strict requirements of the break clause.
- If the tenant fails to operate the break correctly then it must be prepared for dire consequences. A tenant should never assume that if it makes a minor error, the landlord will understand and make allowances to ensure the break is successful.
- It should never be assumed that a judge will be compassionate if the tenant claims it will suffer hardship if the break option is not exercised. A judge will decide whether all the provisions have been complied with and will not allow emotion to cloud the issue.
The moral of this article? Tenants – take extreme care with serving break notices and complying with break conditions, and ensure you understand all the complexities involved. You should take professional advice at least 18 months before the break date to weigh up all the options. Careless? Then you have lots of time to contemplate your misfortune while waiting for the next opportunity to terminate your lease.Back to Our Thinking →