Legal tips for occupiers
Many commercial real estate leases contain an option to end the lease early. This is usually referred to as ‘a break clause’, ‘break option’ or ‘option to terminate’. Break options can be exercised by the landlord, the tenant or both but it is more common for them to be exercisable by the tenant only.
A break option is designed to give tenants greater flexibility. If you are thinking of triggering a break option, there are some pitfalls to avoid. In most cases a landlord will be reluctant for a tenant to end the lease early so it is vital that the correct procedure is followed so that the landlord does not have any excuse to claim that the break option has not been exercised properly. Not following the correct procedure can have serious financial consequences because a tenant can be stuck with a lease they no longer want and remain liable for the rent.
These tips are designed to help you avoid getting caught out and achieve a successful exit.
Be clear about the break date. Is it a one-off or rolling? If it is a one-off date, the specific date is critical and you must make sure you serve notice in time. There are no second chances.
The minimum notice period will be stated in the lease and will usually be between 6 and 12 months. Ensure you factor this time in to your commercial real estate strategy.
You need to be clear who the landlord is. This will not necessarily be the same landlord with whom you signed the lease. You may not have a direct line of communication with the landlord because it is often the managing agents who deal with rent collection and day to day management issues. It is increasingly common for landlords to be offshore entities which can make service of the notice more complicated.
The form of break notice and procedure for serving it should be set out in the lease. This is often done by reference to the relevant legislation so you should seek legal advice to ensure the procedure is followed correctly. Email is often not an acceptable form of service.
Once you have served the break notice it cannot be withdrawn. So you need to be sure you want the lease to end and, if relevant, have firm plans in place for alternative offices.
Break options can be subject to conditions. Typically these will include rent payments being up to date but they can also include tougher conditions which can make it difficult for tenants to trigger the break option effectively. These conditions are interpreted on a very strict basis and non-compliance can result in the attempt to exercise the break being invalid.
Some of the conditions attached to a break option can include requirements to hand back the premises in a particular condition or to remove changes that you have made to the premises, such as partitioning. Make sure that you allow enough time to satisfy those requirements.
You should diarise the break date and relevant notice period. If you are thinking of exercising a break option we recommend you see legal advice at least 6 to 12 months before the last date on which you need to serve the notice. This will help ensure that any conditions are identified and the issues mentioned in this guide can be addressed at an early stage.
Your landlord may be willing to discuss a settlement to end the lease early. In some cases this can help avoid any difficult conditions and removes uncertainty over the validity of any break notice.
Break options can be valuable assets. If you have a break option but have no plans to exercise it, the landlord may be willing to discuss removing the break option in exchange for a financial incentive, often in the form of a rent free period.
This article was first published by DeVono Cresa in The Occupier (February 2018). Read the full publication here.