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Pulling down the shutters? How to exercise a commercial break notice effectively

View profile for Lauren Fitzpatrick
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With the high street retail and dining sectors in a seemingly constant cycle of reinvention our Real Estate Dispute Resolution team provide guidance in this article for tenants who are considering exercising a break option in a commercial lease.

A break option within a commercial lease offers flexibility since it allows the lease to be terminated earlier than the fixed term granted. However while the break clause itself may seem straightforward, they can often be deceptively complex. Validly exercising a break option can be a minefield. Below are a couple of practical points to bear in mind if you are considering doing so:

Intention to Terminate

Do not serve a break notice unless you unequivocally wish to terminate the lease. Once a break notice is served, it is not possible to unilaterally withdraw the notice. A mutual waiver of the notice will constitute the creation of a new lease from the date that the break notice expires. It is therefore important that you consider carefully if exercising a break option is the right option for your business before service of the notice is triggered.

Notice

Make sure you check the break clause and notice provisions within the lease to ensure you serve the break notice compliantly. If the notice provisions require that all notices should be served on green paper, make sure you serve your break notice on green paper.

Check the Pre-Conditions

It is essential that all contractual pre-conditions of the break option are strictly complied with. Ensure that you carefully review the pre-conditions and take note of the date by which the conditions must be satisfied. Some conditions may need to be satisfied before service of the break notice. Others may only need to be satisfied prior to, or at the break date. Remember that time is usually of the essence and if any pre-conditions have not been fulfilled it could invalidate the break, meaning that you are tied in for a longer term than you had intended.

Vacant Possession 

A standard pre-condition of a break clause is usually that the tenant delivers up vacant possession of the entire premises on the break date. Whilst this sounds obvious, tenants can often stumble here because it is not only important to ensure that all of your employees and contractors have vacated in good time, but also that the premises have been left in such a condition that there is no impediment to the landlord making immediate use of them as at the break date. Ensure that nothing is left behind that could be construed as not having provided vacant possession and remember to hand back the keys.

Rent and Other Sums Due

Commonly a break option will be conditional on all rent and other sums due under the lease (i.e. insurance, service charge, interest) having been paid in full prior to, or on the break date. If any sums are outstanding on the break date, the break will not be valid. It is good practice to ensure that payment is made well in advance of the break date to allow for monies to clear. If the lease allows for a refund in the event of an overpayment, it is usually preferable to carry on paying rent and all other sums as normal, rather than attempting to apportion the sums due and making an error which might invalidate the break. You should also check whether the right to exercise the break option is subject to a penalty payment because if so and the payment is not made on time, this will invalidate the break.

Dilapidations

When handing back the property, you must ensure compliance with the yielding up provisions within your lease. Carefully consider what is required well in advance, to ensure that you yield up the premises in the condition that your lease requires at the break date. It is always good practice to attempt to agree a schedule of repair works with your landlord prior to the break date. However, if this does not prove possible it is prudent to instruct a surveyor to advise you on what works need to be carried out in advance so that you are fully prepared before the break date arrives.

Real Estate Dispute Resolution

Goodman Derrick’s Real Estate Dispute Resolution team has a wealth of experience in the commercial property sector.

Our advice is focussed on facilitating practical and commercial solutions, an approach that ensures problems are resolved in the most cost effective way and at the earliest stage.

This article was authored by Lauren Fitzpatrick a solicitor in our REDR team (lfitzpatrick@gdlaw.co.uk, tel +44 (0)20 7421 7919).

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.