Breaking your lease without breaking your contract – Understanding break clauses - Palmers Solicitors

Breaking your lease without breaking your contract – Understanding break clauses

Breaking your lease without breaking your contract – Understanding break clauses

For business owners, flexibility can be as valuable as stability when it comes down to finding the right commercial property.

Understanding how to effectively include, negotiate, and utilise break clauses can save your business considerable time and money. Here’s what you need to know:

 

What is a break clause?

A break clause is a section of a commercial property lease which allows the tenant to break the lease and exit the property at a certain point before the end of the lease.

In the case of properties such as offices, a lease may last 10 years with a break clause at five years.

They are appealing to tenants because, in the case that a company grows or needs less space within the period of a lease, tenants can leave the property in search of a tenancy which better meets their needs.

 

Break clauses in commercial property contracts

A break clause must be explicitly included in the lease agreement to be valid.

When drafting or reviewing a lease, it’s crucial to pay close attention to the wording of the break clause to ensure it aligns with your business needs.

Typically, the clause specifies conditions under which the lease can be terminated early, including notice periods, any financial penalties, and the state in which the property must be returned.

This means that you need to have your lease carefully reviewed before signing it and make sure that it will be suitable for your business for the entire duration of your lease term prior to the break clause.

 

How do I negotiate break clauses?

Negotiating a break clause requires a balance between your need for flexibility and your landlord’s need for security and an assurance that they will have tenants for a specified amount of time.

You should be aiming for a break clause that allows you to exit the lease with minimal financial burden, such as negotiating early exit fees.

This will provide you with the option to respond to changing market conditions or business needs.

Landlords, on the other hand, may seek to include conditions that protect their investment, such as longer notice periods or requirements for the property’s condition upon termination.

 

Key points to negotiate with your landlord

As we have said, there are three major issues that you’ll need to negotiate with your landlord in order to reach a mutually satisfactory contract:

  • Notice periods – This is how far in advance you must inform your landlord of your intention to terminate the lease. Shorter notice periods offer more flexibility for tenants, while landlords may prefer longer periods.
  • Break penalties – Some break clauses include financial penalties for early termination, even though you are doing so within the bounds of the contract, so you can make your lease more cost-effective by negotiating these costs down.
  • Condition of Premises – Although not specific to break clauses alone, most early termination clauses state that a property must be left in a certain condition. Returning the property in good condition is always best practice to avoid contractual disputes.

Make sure to do this in plenty of time before you plan to take possession of the property and avoid signing a contract that you are not happy with.

 

When break clauses may not be appropriate

Despite their benefits, break clauses are not always the most useful approach to a tenancy.

The most important thing to remember is that break clauses typically go both ways, meaning the landlord can also break your tenancy at these points without legal repercussions.

For tenants planning to invest significantly in the leased property, securing a long-term lease without a break clause can offer more stability, ensuring that your investment is not lost due to an early termination.

Landlords, particularly those with sought-after properties, may prefer leases without break clauses to ensure a stable, long-term income stream.

For bespoke advice on break clauses and commercial property contracts, please feel free to get in touch with our Commercial Property team.