Break Clauses in Commercial Leases
A tenancy may contain a term allowing any of the parties to a lease the power to end the tenancy at a particular time or on the happening of a particular event. This term is commonly known as a break clause and is often found in tenancies for a fixed term.
An example of the operation of a break clause is where a landlord let the tenant a property for a term of 25 years with the term enabling the tenants to end the tenancy by notice at the end of the twelfth year.
In order to exercise the break clause tenant must comply strictly with the conditions attached to the term. So in the first example the tenant can only end the tenancy at the end of the twelfth year no earlier and no later.
Again another example is where the landlord lets to a tenant a building for a term of 18 years with a term enabling the landlord to end the tenancy by three months’ notice given at any time should the landlord wish to develop adjoining land. In this example the landlord must show an actual intention to develop.
It is usual to provide that the notice of termination should be given within a certain period. In such a case time will be of the essence.
Break clause ‘issues’ are part and parcel of negotiations for a new lease. For the tenant they offer greater flexibility in how they run the business so that as the break clause option period approaches the tenant can take stock and consider where the future of the business is.
The break clause normally means that the landlord is receiving a shorter term of guaranteed income and this aspect would therefore be priced into the deal.
Break clauses differ in the form of words used but always have conditions attached to them.