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Break Clauses: The Importance of Understanding your Lease.

You may consider the wording of break clauses to be the exclusive concern of your solicitor.  However it is important for businesses to be clear about these from the outset, and take on board the implications.  Failure to do so can be potentially costly, as is shown by a recent case involving Marks & Spencer.

A break clause (or right to terminate your lease before the end of the agreed term) can be in favour of either the landlord, the tenant or both (a “mutual” break).  It is usually exercised on specified prior notice, and will be stated to occur after a certain period has elapsed, often to coincide with a rent review, so that if the parties are not happy with the revised rent it is open to them to terminate commercial propertythe lease before this comes into effect.  If either the landlord or the tenant is not certain if a new venture is likely to succeed an early break can be inserted in the lease.   A break can be of benefit to both parties, for example if a landlord does not wish the tenant to be able to assign to a third party he can exclude provision for this but the tenant will know he has the facility to break and so leave the premises instead.  It can also be to the major detriment of one party.  For instance a tenant who has carried out expensive refitting works will not wish a landlord to exercise a mutual break, forcing him to take a new lease on significantly disadvantageous terms in order not to waste expenditure incurred on the property and to be able to continue operation from it.  

Break clauses usually include conditions which have to be satisfied in order for the break to be exercised.  It is standard for them to include a stipulation that the parties (in particular the tenant) must not be in breach of their covenants under the lease.  The tenant’s covenant to pay rent and make other payments under the lease such as insurance or service charge is of course of major significance in this respect.

You need to be very careful about the timing of rent payments in relation to the break as the landmark case of Marks & Spencer Plc v. BNP Paribas Securities Services Trust Company (Jersey) Ltd. and Another showed.  This turned on the issue of whether a tenant could obtain a refund of rent and other payments made under the lease for an advance period which expired after the break date.  In the end the Supreme Court ruled that it was not entitled to a refund of rent amounting to £1.1million, as the break clause did not allow for this.  This was despite the fact that Marks & Spencer had paid a £1million break penalty.

So you need to check the wording before exercising any break to avoid being stung by unintended consequences.  If you are a tenant you should break as close as possible to a rent payment date or realise you may incur loss. Alternatively if you are a landlord you will not quibble if rent or other payments have been made in advance!  

If you want a professional opinion on the operation of the wording of your lease (or the drafting of a new one) please consult one of our expert Commercial Property solicitors at Bromley, Camberwell, Crystal Palace or Raynes Park.  

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