Karen Mason, co-founder of Newmanor Law, is keen to raise awareness of the benefits and challenges posed by break clauses. Here she offers advice to anyone currently looking to renegotiate or withdraw from a commercial property lease.
The commercial real estate landscape is currently undergoing a transformation as the UK establishes a new normal in the post-pandemic era. With the culture of flexible working now looking set to continue, there will be many business owners looking to reassess their current leases, with an eagerness to include break clauses into agreements.
Of course, negotiating a new and improved lease can be a complex process. And even then, it is not always straightforward to trigger break clauses as and when they are needed. Therefore, it is best practice for business owners to seek professional advice from the outset, so they can prepare themselves for whatever lies ahead.
Uncertainty in the market
Currently, the downturn in real estate letting appears to be widespread. According to global property experts CBRE, office investment in the first quarter of 2021 was down 65% on the previous quarter, and 37% on the first quarter of 2020.
Whilst a wider trend in the acceptance of alternate working patterns was already beginning to emerge in the years leading up to the pandemic, Covid-19 and the resulting lockdowns almost certainly contributed to the decline in demand for commercial property space.
This is the backdrop against which any consideration of the changing nature of commercial leases takes place, with the slump in overall demand for office space impacting on the kind of clauses tenants and landlords will be negotiating.
Negotiating an effective break clause
Understandably, the pandemic has seen more tenants tempted to utilise existing break clauses. Others are keen to insert them into new leases that are being negotiated.
As most commercial leases run for five to 10 years, inserting a break clause into these may offer more flexibility for tenants and landlords. It enables either party to end the lease early so long as certain conditions have been met.
For example, an organisation with a 10-year lease might seek to insert a clause that will give them the option to exit the lease at any point after four years, as long as six months’ notice is given.
As it stands, there is a lot of uncertainty when it comes to a demand for office space. For this reason, the inclusion of a break clause can be one of the main sticking points during negotiations between tenants and landlords.
The impact of a break clause
As a leaseholder, a break clause will enable you to walk away from an agreement if the commercial space is no longer needed. Equally, landlords can use them to remove tenants should there be the potential to raise rents or make more money from a new tenant.
Whilst a break clause can have tangible benefits for the party seeking to utilise it, the process itself is far from simple. As such, it is imperative that both parties consider the clause and mechanics for implementation carefully. Any disagreement can lead to expensive and time-consuming legal action.
From a tenant’s perspective, they must realise that triggering a clause will leave the landlord with the task of having to re-let the premises at relatively short notice. The landlord, therefore, will usually look to resist exercise of any break clause.
Common disputes
The Royal Institution of Chartered Surveyors published a ‘Code for leasing business premises, England and Wales’ in February 2020. This states that the break clause should only be conditional on “the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers …”.
This sounds relatively simple. However, the reality is that many landlords insist on going beyond what is only a voluntary code and imposing stricter conditions.
Disputes between landlords and tenants about the exercise of break clauses are very common. It would be wise, therefore, for any tenant uncertain of their compliance with conditions to employ the services of a specialist real estate lawyer or surveyor to closely work through the break clause.
Seeking legal advice
It is important to remember that once a break clause has been triggered by a tenant, it cannot be legally revoked. Even if circumstances change during the notice period. It doesn’t matter if both parties agree to nullify the clause. Once it has been triggered, there is no turning back.
Therefore, any tenant needs to think through their decision carefully before they act. And during the drafting process, it is crucial that legal advice is taken early on so that both parties fully understand the gravity of the clause and the provisions it contains.
Karen Mason is a highly experienced commercial property lawyer and co-founder of Newmanor Law, a specialist real estate law firm.
