As businesses look towards life after the pandemic, many are keen to renegotiate their leases to better reflect their current working models. Lockdown trends such as flexible working seem to have been adopted for the long term by some organisations, as employees want to enjoy a better work–life balance and businesses seek to lower their overhead costs.
However, negotiating and implementing a new and improved lease that includes a break clause, which would enable greater flexibility, is not a straightforward task. To streamline the process, business owners are encouraged to seek expert legal advice from the outset.
According to research from CBRE, office investment in the first quarter of 2021 was down 65% on the previous quarter and 37% on the first quarter of 2020.
This widespread downturn in real-estate letting has undoubtedly been accelerated by flexible working patterns, although the trend was beginning to emerge before the pandemic.
Any consideration of the changing nature of commercial leases takes place in this context, with the slump in overall demand for office space affecting the kinds of clause that tenants and landlords will be negotiating.
As a result of this uncertainty, a growing number of commercial tenants have been tempted to use existing break clauses or insert them into new leases.
A break clause offers increased flexibility for tenants and landlords because it enables either to end a lease early so long as certain conditions have been satisfied.
For example, an organisation negotiating a ten-year lease might seek to insert a clause that will give the option to exit at any point after four years, provided six months' notice is given. Exercising that break clause will enable it to walk away if a commercial space is no longer required, or it needs to downsize to save money and protect jobs.
Equally, landlords can use break clauses to remove tenants should there be the potential to raise rents, or to make more money from a new tenant better suited to the space. In the past, tenants have been reluctant to give landlords break options for this very reason, but in the new context they could be included by mutual agreement.
While a break clause can benefit whichever party seeks to use 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 about whether the provisions have been fulfilled can lead to expensive and time-consuming legal action.
A tenant for instance must realise that triggering a break clause will mean the premises must be relet at relatively short notice, so the landlord will usually look to resist exercise of any such clause. Exercising a break clause is a very technical operation and landlords will always try and attack a break clause on every technicality e.g., insufficient notice given, not served correctly, or vacant possession has not been given.
Given the current state of the commercial property market, the inclusion of a break clause can be one of the main sticking points during lease negotiations between tenants and landlords. Disputes between landlords and tenants about the exercise of such clauses are also very common.
RICS published the first edition of the Code for leasing business premises professional statement for England and Wales in 2020. This document states that the break clause 'should be conditional only 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; but the reality is that many landlords insist on going beyond what is only a voluntary code for them, although all members will be bound by the code, many landlords will not see themselves as so fettered and may impose stricter conditions.
'The inclusion of a break clause can be one of the main sticking points during negotiations between tenants and landlords'
All parties must consider the details in the break clause about how, when, where and to whom notice is served, as these requirements must be observed precisely.
Tenants and landlords alike need to know that a break clause will be rendered invalid if the precise conditions outlined in the lease are not met. The tenant will also need to ensure that rent payments are made until and including the break date, even if that means paying for a period that falls after the break itself.
It would be wise, therefore, for any tenant uncertain whether they comply with the lease conditions to employ the services of a specialist real-estate lawyer or surveyor to work through the break clause.
One of the most important things to keep in mind is that once a break clause has been triggered by a tenant it is legally binding and cannot be reversed.
Even if circumstances change during the notice period and both parties agree to modify the clause, there is no turning back from a technical point of view.
Therefore, any tenant needs to think through the decision carefully before exercising a break clause. It is crucial that legal advice is taken early on in drafting a lease, so that both parties fully understand the gravity of the clause and the provisions it contains.
If you need support negotiating a break clause in a new or revised lease, or guidance on triggering an existing one, contact an experienced legal team for advice beforehand.