How commercial tenants can utilise break clauses to their advantage

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Manufacturing & Engineering Article

23 February, 2021

The implications of Brexit and the ongoing Covid-19 pandemic have meant that most businesses are carefully considering all costs and risks to their business, including costs and risks associated with properties that they own or occupy. Tenants may wish to carefully consider their existing obligations contained in leases of properties that they occupy, in particular any break clauses.

What is a break clause?

A break clause is a common clause used in leases that may allow either party (but more frequently the tenant) to obtain an early termination of the lease, often (in the case of a tenant's break clause) on the condition that certain requirements have been fulfilled. It is normally utilised by tenants whose use for the property has become obsolete before the end date of the lease.

How can it be used to re-negotiate lease terms?

Given the current economic conditions, landlords across the country are often more open to giving, and tenants may want to consider using their break clause as a bargaining chip in re-negotiations. It may be that a tenant would prefer not to terminate a particular lease on an upcoming break date if they can obtain a more favourable deal on their existing lease. If a tenant is willing to forgo their break clause, a landlord may be willing to make concessions in other areas. For example, this may take the form of the landlord agreeing to a rent-free period in a lease, or a period of reduced rent or even just changing rent payment frequency from quarterly to monthly to assist the tenant with cash flow.

How and when should this be done?

To put this into practice, both parties should sign what is known as a Deed of Variation, to document the agreed changes to the lease. If the tenant (or the landlord) wishes to explore this option, then the key is to plan and negotiate with the other party early (ideally several months before the break notice needs to be served). This is because once a break notice has been served, it cannot simply be revoked at a later date. Both the landlord and the tenant should therefore seek to avoid a situation whereby the tenant feels compelled to serve a break notice due to an impending deadline when in reality the parties simply wish to agree on concessions. The service of the break notice has implications for both parties and may mean that the lease is terminated in circumstances where it could have been avoided had action been taken earlier.

There may be genuine benefits to both parties in negotiating a lease variation where there is a break date on the horizon. In the current economic climate, a landlord may be glad of the security of a good tenant for a few more years without the fear of an impending empty property (and may feel that a few months' rent-free is a price well worth paying for that security). Where this is the case, both parties would be well-advised not to leave negotiations to the last minute. Before entering into any Deed of Variation to your existing lease (or serving a break notice), you should seek legal advice.

For more information contact Richard Clithero in our Manufacturing & Engineering department via email or phone on 0333 207 1159. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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