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A break clause is an option to determine a lease at an agreed point, before the end date of the lease. This may be exercisable only on one specific date, or it might be that it can be used on any date after a certain period. The clause will usually also say if it can be exercised by the landlord, by the tenant or by both. If the break clause is silent as to who can exercise the right to break, then it is exercisable only by the tenant.
Frequently, a break clause within a lease will only be exercisable if certain conditions are met. These will vary depending on the terms of the lease. Examples of conditions to exercising a break clause may be that all rent must be up to date, or that the property must be restored to its original condition. Case law indicates that any pre-conditions must be strictly complied with in order for a break clause to be validly exercised.
It seems likely that the impacts of COVID-19, such as businesses being in a state of distress and financial strains on all, will cause an increase in the numbers of both landlords and tenants considering exercising their break clauses in their commercial leases.
In the current climate of uncertainty, any conditions attached to a break clause should be carefully considered.
The tenant may be required to pay rent in full up to the date of the exercise of the break and the termination date. If tenants cannot pay or are in dispute, they will not be able to satisfy this condition. Tenants should check with landlords that all of their rent is up to date.
If any rent concessions have been agreed, which many landlords and tenants are likely to be considering due to increasing financial pressures, they will need to make sure that they address the issue of the rent condition in the break when they are dealing with the concession.
Rent may also refer to service charge rent. Presently, most large sites such as shopping centres have been subject to closures. This could mean service charge sums may be in dispute if tenants are not benefitting from any services for the period of the closure. Tenants should consider the provisions in the lease carefully as they will potentially still need to pay any charges (even those in dispute) in order to meet the conditions in the break clause.
For commercial tenants currently concerned about rent payments, it is worth noting that under the Coronavirus Act 2020, commercial landlords are presently unable to forfeit a lease for non-payment of rent between 25 March 2020 and 30 June 2020 (or longer if the government deems it necessary).
The break clause may require tenants to give vacant possession on the break date. This usually includes the removal of fixtures and fittings. If a tenant has exercised a break by giving notice and the break date is coming up, tenants should be alert to any new announcements for removal companies. As of 31st March 2020, the current government guidance for removal companies is to honour any existing commitments, whilst following the measures in place such as abiding by the 2-metre rule. Removal companies are only able to enter properties which have not been exposed to COVID-19. The government guidance is ever-changing so both parties should pay close attention to any new announcements in this respect. If a tenant is unable to remove any fixtures or fittings, this may invalidate the break notice. Further, if there are any sub-tenants in the occupation of the property, the tenant will be unable to provide vacant possession.
The break clause might require a tenant to have complied with its obligations in the lease in respect of reinstatement of alterations or decorating. As with vacant possession, it may be that compliance with these obligations is not currently practicable.
For instance, if a property requires extensive works it might be that it is not possible to arrange these works being carried out within the specified period of time, or even at all as there is no certain end date to the lockdown period.
Landlords and tenants could also consider whether a deed of surrender can be entered into. A deed of surrender is a consensual arrangement between both landlord and tenant to determine the lease. This may be a more practical consideration at present given the potential difficulties of complying with break clause conditions. Landlords could agree to waive some of the conditions on the break but preserve the obligations on the tenant to carry out or pay for dilapidations or pay rent. However, it is worth noting that landlords are under no obligation to enter such a deed or to re-negotiate the terms of the lease.
If either party believes that the conditions attached to the break clause are satisfied and that the break clause date has been met, it is essential to also comply with any requirements relating to notice for the break. Usually, the form and the length of the notice will be determined in the lease. Unless the break clause provides otherwise, the notice to break is normally given by written notice in accordance with the service requirements contained in the lease. Consideration needs to be given whether in the current circumstances the parties are able to comply with the strict service provisions in the lease.
Should you require any further information regarding how COVID-19 might impact the provisions in your lease you can contact a member of our dedicated Real Estate team on 01619414000 or at firstname.lastname@example.org