"Break clauses act as a safety net for businesses and offer them an opportunity to scale up or down based on economic conditions. They also help businesses avoid being locked into long-term leases that no longer serve their needs"
- Johnathan Hand - The Lease Negotiator
The commercial property world has seen a dramatic shift in recent years. The Covid-19 pandemic permanently altered working patterns, making the traditional model of long, inflexible lease agreements less viable for businesses that need to be able to swiftly adapt to changing market conditions.
With economic uncertainty, changing workforce demands and evolving industry trends, flexibility has become more important than ever.
One of the most effective tools for businesses looking to maintain flexibility in their lease agreements is the inclusion of a break clause. These clauses allow the lease to be terminated early under specific conditions and have become increasingly valuable in commercial property agreements.
The growing demand for flexibility
The demand for flexibility in commercial leases has risen sharply, particularly in the wake of the pandemic.
Many businesses have reassessed their office space needs due to the widespread adoption of hybrid and remote working. In a recent Forbes Advisor poll, out of 1,100 respondents, 63 per cent worked remotely either all or some of the time.
This shift has had a direct impact on leasing trends. Businesses are increasingly reluctant to commit to long-term leases without the option to adjust or exit based on changing circumstances. This has led to a greater emphasis on break clauses in new lease agreements, allowing companies to retain control over their property commitments.
Understanding break clauses
A break clause is a provision in a commercial lease that allows either the tenant, the landlord, or both to terminate the lease early, subject to predefined conditions.
These conditions typically include a notice period [often six months], rent and service charge payments being up to date and compliance with lease obligations.
Break clauses act as a safety net for businesses and offer them an opportunity to scale up or down based on economic conditions. They also help businesses avoid being locked into long-term leases that no longer serve their needs.
The challenges of exercising a break clause
While break clauses offer clear advantages, they aren’t without challenges. To enforce a break clause, the tenant must have strictly complied with its conditions, and any misstep, like missing a notice deadline or failing to meet lease obligations, can result in the break clause being rendered invalid.
One common issue is the requirement for "vacant possession." If the lease states the premises must be returned empty of all goods, failing to remove office equipment, furniture or signage could technically invalidate the break.
Additionally, landlords may choose to challenge a break clause if it isn’t perfectly executed. Since break clauses introduce uncertainty into a landlord’s revenue stream, they may go down the legal route to prevent the lease from ending prematurely.
Getting the timing right
For most businesses, break clauses are typically set at the end of the third or fifth year of the lease.
However, choosing the right timing requires careful planning. Consider your business’s growth trajectory, financial position and potential market conditions when deciding when to negotiate a break clause.
Since break clauses are negotiable, ensure the timing aligns with your long-term objectives, providing flexibility without unnecessary risk.
Strategic considerations for tenants
Given the potential complexities of exercising a break clause, tenants need to take a strategic approach.
It’s crucial to negotiate clear terms from the outset, ensuring the break clause is fair and unambiguous. Staying compliant with lease obligations is equally important, as any outstanding rent or service charges could jeopardise the right to break the lease.
Notice requirements must be strictly adhered to, following the exact period and method of delivery specified in the lease. Seeking expert advice before serving a break notice can help avoid costly mistakes and ensure the process is executed properly.
Final thoughts
Moving forward, flexibility will continue to be a key factor for businesses entering commercial lease agreements.
Break clauses provide tenants with essential adaptability, ensuring they aren’t locked into long-term commitments that might no longer suit their needs. However, these clauses need to be negotiated carefully, clearly drafted and meticulously followed to ensure they serve their purpose.
For tenants, understanding the implications and requirements of break clauses is crucial. Ultimately, flexibility is everything for businesses today, and companies that secure well-structured break clauses will be able to more easily respond to market shifts, ensuring their commercial property strategy fits their broader business goals.
