Stephen Firmin of Jackaman Smith & Mulley Solicitors examines some of the potential pitfalls of break provisions and whether they really provide commercial tenants with genuine flexibility.

In today’s competitive commercial property market, tenants are looking for as much flexibility as possible in order to protect their future business interests. A useful way of taking “arms against a sea of troubles” can be to negotiate, on entering a long lease, a break clause which gives the tenant the right to bring the lease to an end part way through the agreed term. This may be useful in circumstances where a business changes significantly over a short period resulting in a need for larger or smaller premises; or where there is a need to guard against the risk of being tied to a rent which may fall significantly out of line with the market rate over time.

But in reality break clauses can give the unwary tenant a false sense of security. Very few (if any) landlords will accept break provisions without conditions over and above the requirement for the tenant to give prior notice.

Traditionally break clauses were drafted so that the break could only be exercised if strict compliance of the lease terms had occurred. As a compromise, and more common nowadays, break clauses allow for material or substantial compliance with the tenant’s covenants. However a tenant in a strong bargaining position might negotiate a break clause based on reasonable compliance. In any event break clauses usually need to be exercised within strict time limits.

Herein lays the tenant’s problem. The tenant whose business needs are changing wishes to exercise the break clause. The landlord does not want his tenant to leave either because the tenant is currently paying a higher than market rent or because the landlord foresees difficulty in re-letting the premises.

There may follow a period of stalemate. The landlord may ignore the tenant’s request for discussion. When a dialogue finally takes place the parties’ interpretation of the words material, substantial or reasonable are likely to be very different. The break clause being time sensitive means that as time slips away the balance of negotiating power moves to the landlord.

The tenant, backed into a corner misses the opportunity to exercise the break clause or, alternatively, attempts to exercise the break by repairing, redecorating and ensuring the rent is fully paid in accordance with the lease obligations. He vacates the premises only to be served a rent demand by the landlord who claims the break has not been exercised validly. Case law suggests that the wording of a break clause will be strictly interpreted by the Courts and so the tenant faces a period of costly litigation or is forced to negotiate a settlement with the landlord.

Break provisions not properly thought through, managed and implemented as part of the tenant’s business plan may cause him to “suffer the slings and arrows of outrageous fortune” at the hands of the landlord. Of course Hamlet may have been driven mad but with careful planning and good advice, this should be a fate a commercial tenant can avoid.