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As a company owner navigating the current economic climate, you’ll understand the importance of flexibility in business.
The ability to pivot during times of uncertainty can be a vital tool in keeping your business alive. This flexibility is equally as important when it comes to your premises.
If you are tied into a long commercial lease without the ability to escape, the drain on your cashflow can be disastrous. As such, having a break clause as an escape route can be critical.
In this article, we’ll discuss break clauses and why they’re such an important consideration when negotiating your new lease terms.
What is a tenant break clause in a lease?
A tenant break clause in a lease is a term inserted into a commercial lease agreement by which a tenant may serve a notice to terminate that lease early on the terms set out in the clause.
For example, a landlord and tenant may agree on a three-year lease term with a one-year break. This would mean that the entire lease term is three years, but the tenant may break the lease after the end of the first year by serving due written notice on the landlord and meeting any conditions laid out in the clause.
The required notice for such a clause is around three months but could be shorter or longer. If the tenant misses the window of opportunity to activate the break clause, the lease will run to the end of its full contractual term.
What are common break conditions?
The break clause typically sets out a series of conditions that must be met for the break to be activated. The main conditions are usually that:
- The rent and all other lease payments are paid up to date
- There are no tenant breaches of the lease
- The premises are returned to the landlord in the condition required by the lease
Why are tenant break clauses useful?
The reason why break clauses are useful is that they give the tenant an advantage. They allow a tenant to try out new premises in a less risky manner.
The tenant can utilise the period leading up to the break clause to decide whether that particular property is right for them – whether from affordability or a location/footfall point of view.
If the premises are suitable for them, they have the benefit of being able to see out the remainder of the lease term and then agree on a renewal if desired. If the premises are unsuitable, they can simply give the notice to terminate the lease early without any liability for the rest.
Additionally, tenant break clauses can also be negotiated as part of a lease renewal. You may be renewing your lease but would feel more comfortable with a break clause to minimise the length of your commitment if, for example, you are considering alternative premises or are gauging the general outlook for your business.
Are break clauses easy to negotiate?
As with many other lease terms, this largely depends on bargaining power.
If the property has been vacant for a long period of time and the landlord is desperate for a tenant to generate a flow of rent, they may be very happy to include a break clause if it helps get the deal over the line.
However, if there’s great demand for the premises in question, such that the landlord has a healthy selection of potential tenants, they may prefer a straight lease without a break clause.
This helps alleviate the worry that the tenant might terminate early and then they would have to find a new tenant, which all involves time and money.
Sometimes a happy medium can be found in these situations if you’re willing to be flexible in other areas of the lease negotiation, such as on the rent figure, the rent review terms, etc.
Wrapping up
Understanding the importance of break clauses in your new lease is crucial for business owners seeking flexibility in today's uncertain economic climate. The ability to adapt and make strategic changes is vital for the survival and success of your company.
Without a break clause in your commercial lease, you could find yourself trapped in a long-term commitment that poses a significant drain on your cash flow.
A tenant break clause offers you an escape route by allowing you to terminate the lease early under specific conditions outlined in the clause. This provides you with the opportunity to assess the suitability of the premises, test new locations, and evaluate the market without incurring further liabilities. By exercising a break clause, you can minimise risks and make informed decisions about the future of your business.
Negotiating break clauses can vary depending on the bargaining power and demand for the property. However, a skilled commercial property lawyer can guide you through the process, ensuring your interests are protected.
LawBite, with its experienced and friendly team of lawyers, specialises in commercial, corporate, and employment legal matters. By seeking their expertise, you can navigate the complexities of break clauses and lease negotiations, giving your business the flexibility it needs to thrive.
About the author
Ashley Gurr is a contracts and commercial property lawyer at LawBite. Ashley has over 15 years of experience in private practice helping SMEs and in-house for an international consultancy group advising on commercial contracts and a multi-national utility giant in a contract strategy role.
