Why are break options so important to tenants? Ultimately they give tenants flexibility to adapt to market conditions and their changing business needs.
Exercising a break option can be fraught with difficulty. Get it wrong and the tenant will lose the break and the lease will continue.
Understanding the break
Every break option is different and must be read carefully to see what is required. The key points are:
1. Breaks nearly always have conditions attached;
2. Typical conditions include:
(a) Serve a written notice;
(b) Pay a break premium;
(c) Give vacant possession; and
(d) Pay the principal rent.
3. Beware of the more onerous conditions
The two most common ones are:
(a) payment of all sums due under the lease. This catches rent, service charge, interest and costs.
(b) Compliance with other covenants. This picks up ALL tenants’ covenants including the repair covenant.
4. Tenants should act defensively to ensure that they do not fall into one of the common traps and thereby lose the break.
5. Common mistakes
(a) Failing to pay “all sums due” which can include unusual sums like the landlord’s costs and interest on late payments. For instance in a 2012 case, a tenant failed to pay £130 of interest on late paid rent. This was held to be fatal despite never having been demanded by the landlord.
(b) Failing to do necessary work to the property. For instance in a 1997 case the tenant failed to paint with 3 coats of paint using only 2!
How can you get it right?
The correct approach is to know, and do, what your clause requires at the right time. That requires good advice, systems, planning and management.
Step 1 – Negotiate unconditional breaks when agreeing Heads of Terms. Get your lawyer to minimise/resist any conditionality.
Step 2 – Get advice from the outset on what the break requires and diarise key dates.
Step 3 – Instruct solicitors in good time to serve notice.
Step 4 – Pay sums on time. If in doubt it is better to pay more and claim it back after the break date. Don’t jeopardise the right to break for a few pounds.
Step 5 – If works are required involve a building surveyor as soon as possible to prepare a schedule of works and timetable. Take steps to try and agree works with the landlord beforehand. But if the landlord doesn’t want to play ball always have in mind a final date by which works must be done and stick to it.