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An effective break?

Posted: 21/03/2014

Most estate managers will be fully aware that careful thought should always be given before a break clause is exercised.  The recent changes to the ownership of the NHS estate and provision of community services will ultimately ensure that break clauses have increased significance for managers of health and care premises over the next 12 months.  Decisions to relocate certain services will almost certainly be influenced by the availability of a convenient tenant break clause.

The period leading up to and after the service of a break notice is a minefield for the unwary.  There is no such thing as a standard break clause; each is different and its construction will turn on the facts.  So, the starting point for exercising an effective break is always to consider the drafting of the clause in the lease and remember that a notice is irrevocable once served.  What follows is an examination of some common types of break clauses and threats to effective service.

An unconditional break

It is extremely rare to find a break clause with absolutely no conditions attached. There is little risk here (provided that any notice requirements are met) of a break notice being ineffective.  When the lease comes to an end, however, the tenant will still be contractually liable for any breaches of covenant which occurred during the lease term.  Dilapidations should therefore be considered and negotiated with the landlord early on.

The dual condition break

A tenant with good bargaining strength will often manage to negotiate a break which is conditional only upon vacant possession and payment of rent.  Here, the lease will come to an end and the tenant can walk away provided all rent payments have been made up to date and vacant possession is given. A note of caution: care should be taken as to when the conditions have to be satisfied by. The ideal position for a tenant is the satisfaction of conditions by the break date.  It may be, however, that the clause is drafted to require satisfaction of conditions prior to service of the notice. There is also often confusion around what constitutes vacant possession and so legal advice should always be sought especially where any underletting or sharing of possession has taken place.

Multiple condition break

This is the most common type of break and in addition to vacant possession and payment of rent, tenants are likely to have to satisfy an obligation to comply with all tenant covenants in the lease; even minor breaches could invalidate the purported break.  Such a condition is extremely onerous and will usually have been watered down by the tenant and make reference to 'material breaches of covenant' instead.  Another possible condition is the payment of a penalty for exercising the break. 

Regardless of the condition, consideration needs to be given in advance to how it is to be satisfied and by when it must be satisfied so that an effective break is achieved and tenants are no longer tied to premises which are surplus to requirements.



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