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/ 12 Dec 2014

Break Clauses: The operation of Break Clauses in Commercial Leases and the refund of overpayments…

This guide on break clauses is for…
1. Landlords and Tenants negotiating Heads of Terms with a break clause in.
2. Landlords and Tenants with an upcoming right to break.

Break clauses allows a landlord and/or tenant to terminate the lease early. Break clauses are a feature of many fixed term leases and build in flexibility for the party with the break right. 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.

Break clauses can be an incredibly complex area; both in terms of the negotiation over the operation, the drafting of the clause and the exercising of the break right. Negotiating the right kind of break clause is essential to both landlords and tenants and the legal drafting of the same is just as important. There are usually conditions attached to the exercise of the break right – these must be strictly adhered to if either party wants to terminate the lease.
A ‘Break Date’ will usually be defined term in the Lease and will provide for termination in one of the following ways:
o Termination can occur at any time – this is known as a ‘rolling break’.
o Termination can occur at any time after a specified date has passed – this means that there will be a minimum period of occupation for the tenant.
o Termination can only occur on an agreed fixed date or dates – this means that there is no rolling break option, termination can only occur on specified dates.
Make sure you agree a break right that works for you at the outset and ensure that you fully understand the way the option to break works.
Refund of overpayments
Where rent is paid in advance, an issue can arise if the break date falls between rent payment dates. If the lease is silent on the refund of overpaid rent, the default position is that rent will not be refunded to the tenant. On that basis, it is essential – from the tenant’s point of view – that the lease either expressly details the refund of overpayments or provides for the break date to occur on a rent payment date.
Restriction on use
There will usually be some form of restriction on the exercise of the option to break. It is crucial that you are fully aware of the conditions in place to exercise the break as failure to adhere can result in rejection of your application to break the lease. Where the tenant has an option to break the lease, the following are common conditions put in place:
o Rent (and sometimes ‘all payments’) must be fully paid up.
o The tenant must have performed all its covenants. The requirement to not be in breach of the repairing covenants is sometimes addressed separately.
o The tenant must give vacant possession.

The landlord’s right to break will very often be unqualified but can include a restriction that he can only break the lease if there is an intention to redevelop the property.

Keeping informed…
The right to break the lease is an important feature of any commercial lease for both the landlord and tenant. When granting or taking on a new lease, it is imperative that you are fully informed of how your break right works. If, during the term, you wish to exercise your break right, make sure that you take appropriate advice about the service of notice to break. The same applies to being on the receiving end of a break notice to ensure that you are aware of your rights.

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