8th Dec 2015

The hidden dangers in break clauses

In contrast to the 1980s and 1990s, when commercial lease term lengths were 15 to 25 years and tenants were tied in for long periods, typical present day lease term lengths are 3, 5 and 10 years with the tenant having the benefit of a break clause entitling it to call a halt to the arrangement at some point during the term.

However, tenants should be aware of the potential dangers. Break clauses which are cleverly drafted (by the landlord) can trap the unwary. An obvious example is a pre-condition which must be satisfied by the tenant before the break is deemed effective. Make sure it’s one you as a tenant know you can satisfy. Don’t, for example, agree that the satisfaction of the repair and decorating covenant is a pre-condition to the break, otherwise you may find that the landlord seeks to use the flimsiest of lapses by you as a means to defeat the break and keep you on the hook for the rest of the term.

One issue, which has been confirmed in a recent Supreme Court decision, concerns the payment of rent (and other sums such as insurance and service charge) in advance. Typically, a lease will say that the tenant must pay these sums quarterly in advance on the “quarter days” (as they are known). What happens, however, if the date upon which the tenant may exercise its break falls between two quarter days? In a case which many will find puzzling and downright unfair on tenants, but which will delight landlords, the judges in Marks & Spencer v BNP Paribas ruled that a tenant cannot recover rent paid in advance for the period after the break date where it exercises a break part way through a rent quarter unless the lease specifically provides so. Tenants must therefore ensure that, in leases which have a break clause, there is a contractual obligation on the landlord to repay the tenant all sums paid by it in advance which relate to a period after the break date. Without this, the Supreme Court has made clear that, unfair though it may appear, one will not be implied.

Written by Richard Wheeldon of Berwins Solicitors

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