Commercial leases play a crucial role in securing premises for various operations. However, circumstances may arise where a business needs flexibility and the ability to exit a lease before its agreed term is up. This is where a break clause in a commercial lease becomes significant. In this article, we’ll explore what a break clause is, how it works and whether it’s a viable option for your business.
What is a commercial lease break clause?
A break clause in a commercial lease is a contractual provision that allows either the landlord or the tenant to terminate the lease prematurely, usually before the end of the fixed term. It provides an opportunity for either party to exit the lease by giving notice within a specified timeframe, subject to certain conditions which are set out in the lease.
Do commercial leases always have a break clause?
Commercial leases don’t always include a break clause. The inclusion of a break clause is subject to negotiation between the landlord and the tenant. Some landlords may be open to adding this clause to attract potential tenants who want flexibility. However, other landlords may prefer the stability of a fixed-term lease without the option of early termination.
How does a break clause work?
A break clause typically stipulates the conditions and procedures for activating it. Here's how they generally work:
- Notice period – the break clause will specify the notice period required for exercising the right to terminate the lease (this notice period is often several months in advance, allowing sufficient time for both parties to prepare for the termination)
- Conditions – the break clause may also outline certain conditions that the parties must meet to validate the break (keeping the rent up to date, ensuring the property is vacant and complying with repair may obligations are just a few examples. Failure to meet these conditions can render the break notice invalid)
- Legal advice – it’s crucial for both landlords and tenants to seek legal advice before exercising a break clause (seeking professional guidance ensures that you carry out the process correctly, thereby reducing the risk of disputes and potential legal consequences – if you fail to exercise the break validly, you could be stuck with the lease until its expiry point, so it’s in your interests to ensure it’s done properly)
Can I walk away from a commercial lease?
Walking away from a commercial lease without the inclusion of a break clause can present considerable challenges. In such a scenario, you’ll find yourself bound to fulfil the lease terms or required to proactively engage in negotiations with the landlord to secure an early termination. It’s crucial to note that walking away without a legal reason can potentially expose you to financial penalties and legal consequences. It’s advisable to approach such situations diligently and seek appropriate legal guidance to safeguard your interests.
How to negotiate a break clause
When entering into a commercial lease, negotiating a break clause can provide much-needed flexibility. Here are a few tips for negotiating a break clause:
- Early termination date – determine the earliest date at which you may need the option to terminate the lease (this will help set the notice period and conditions for exercising the break clause)
- Notice period – negotiate a reasonable notice period that allows both parties ample time to adjust to the termination (consider the nature of your business and industry standards when determining the length of the notice period)
- Conditions – discussing the conditions that the break clause must meet for validity is important (seek clarity on fulfilling any specific obligations, repairs or rent payments before exercising the break clause)
- Seek legal advice – Engage a legal professional experienced in commercial leases to review and negotiate the terms of the break clause (they can provide guidance on protecting your interests and ensuring a fair and enforceable agreement)
Get legal assistance from LawBite
A tenant clause in a commercial lease offers small businesses the flexibility they need in case circumstances change. It allows the tenant to terminate the lease before the end of the term, subject to certain conditions and notice periods.
At LawBite, we understand the importance of having legal solutions that cater to the needs of entrepreneurs, startups and small to medium-sized businesses. With that in mind, we highly recommend considering the inclusion of a break clause in your commercial lease and negotiating its terms to best suit your business's requirements. By including a break clause, you can:
- Mitigate risk – business circumstances can change and having a break clause provides an exit strategy that can help mitigate risks associated with long-term commitments (it allows you to adapt to changing market conditions, business growth, or unforeseen challenge)
- Enjoy flexibility – a break clause offers the flexibility to reassess your business needs and premises requirements during the lease term (it provides an opportunity to relocate to a more suitable location, downsize or expand operations, or even terminate the lease if the business is no longer viable)
- Make cost savings – including a break clause in your lease can lead to long-term cost savings (it gives your business the freedom to terminate the lease early if the property no longer meets your needs due to growth or poor market conditions)
- Have some negotiating power – when negotiating a commercial lease, discussing the inclusion of a break clause demonstrates your business's flexibility and proactive approach (even if the landlord doesn’t agree to your request, it may allow you to secure concessions or trade-offs in other areas of the deal, such as rent reviews, repairs or renewal options)
If you’re a commercial tenant and want to find out more about break clauses or your rights under the Landlord and Tenant Act 1954, you can contact one of our expert commercial property lawyers, who can provide strategic and practical advice at all stages of the Commercial Lease Agreement process. To find out more, book a free 15 minute consultation today or call us on 020 3808 8314.