After two months, the lockdown has had a profound effect on business. Offices are empty or manned with skeleton staff; remote working has exploded; hospitality businesses and many shops are closed; and as at 4 May HMRC reported that 6.3 million employees had been furloughed.
As a commercial tenant the future of your business may be uncertain. Alternatively, you may be considering embracing remote working once lockdown ends, if your business has continued efficiently during this period. Whatever the reason, tenants have been reaching for their leases to evaluate the possibilities of ending them early.
Typically the options are: (a) finding a new tenant to take an assignment of the lease (subject to restrictions in it); (b) negotiating a surrender with the landlord; (c) if you do not pay the rents or comply with your covenants, the landlord can (but does not have to) take steps to forfeit the lease (although there are restrictions currently in place under coronavirus legislation until at least 30 June 2020); (d) if you decide to wind up your company, a liquidator may be able to disclaim liability under your lease; or (e) a lease may contain a right to terminate it before the expiry of the contractual term, known as a ‘break option’. Here, we look at this option in more detail.
Types of break option
A break option can take various forms, including:
- A fixed break option, which allows the tenant to break the lease on a particular date, usually after a number of complete years; and
- A rolling break option, which allows the tenant to break the lease at any time after a certain date.
Service of notice
To exercise a break option, a tenant must give notice to the landlord. The period of notice will be set out in the lease – six months is usual. The lease may stipulate the form of break notice, how notices are to be served, and when a notice is deemed to be served. One must strictly comply with the requirements or risk the notice being invalid and take care to build in sufficient time for the notice to be deemed served.
An option to break will usually have conditions attached to it that must be complied with, sometimes when the break notice is served, more commonly on the break date itself. Again, strict compliance with these is required, or the break may be ineffective and the tenant could remain tied to the lease for the rest of the term.
Pre-conditions may include:
- that the tenant is paid up on some or all rents reserved by the lease;
- that the property is given up with vacant possession or free of any occupiers and interests;
- certain covenants have been complied with.
Whilst not necessarily a condition for the break, a tenant should also consider their obligations when the lease ends, including covenants to return the property in a certain state of repair and condition (terminal dilapidations).
Landlords have strong motives to resist the exercise of a tenant’s break clause, particularly in a fragile market when it may take time to replace a tenant and/or market rents may have fallen. Landlords may therefore be proactive in finding ways to defeat the exercise of a break option.
Great care should be taken by a tenant who wishes to exercise an option to break the lease. Getting it wrong can be an expensive mistake if, for example, they have to pay rent for another five years and have incurred costs in arranging new premises. Legal advice is strongly recommended to avoid encountering any pitfalls. Contact our commercial team for more information.