Overview
It is vital that your break option contains minimal conditionality. Otherwise you risk not being able to operate it successfully which could prove very costly indeed.
It is also imperative that your break option is negotiated at the same time as the other key terms such as length of lease, headline rent, rent free period, repairing obligations and so on.
If you leave it for your lawyer to agree the detail of the break option, you risk having to accept conditions that may undermine its effectiveness. This is due to the fact that by the time lawyers are instructed, the point of maximum leverage in the negotiation process has passed. As time goes by, the landlord’s position strengthens as you start to plan and invest in the move. It therefore becomes increasingly difficult to enhance any of the commercial terms which include, the break option.
What minimum conditions are reasonable?
In our experience, most landlords still insist on highly conditional break clauses. They will argue that they need to include such conditions in order to safeguard their legal position. However, in most cases other legal remedies exist for them to secure damages against a tenant that has failed to observe a lease obligation. It is therefore difficult for them to justify such conditions, providing they are challenged effectively.
Landlords are aware that even a minor technical breach is likely to cause the tenant’s break option to fail. For example, suppose your break option stipulates that you must ‘yield up the premises with vacant possession’. If you left a solitary waste paper bin in the corner of the office when you vacated, your break option would technically fail. This would mean your business would have to continue paying rent and meet all its other lease obligations until either the end of the lease or the next available break date. Good news for the landlord, not so good news for your business. This is not a hypothetical scenario. It has happened and been upheld on appeal, in a court of law.
The only two conditions that really ought to apply to the operation of a break clause are as follows:
A) the tenant should give up possession of the property (note, this is different to giving vacant possession); and
B) the tenant should have paid all the Principal Rent that is due.
Any other technical requirements such as the payment of ‘Rents’ or ‘compliance with lease covenants’, are fraught with danger from a tenant’s point of view and should be avoided at all cost.
What are the most common mistakes?
The simplest and most common mistake other than their drafting is for the break notice deadline to be mis-calculated or forgotten about altogether. Take the case of a business owner that contacted TAG recently asking if we could help him relocate his office. When we reviewed the lease it was apparent that the break notice deadline had been missed by just one day. This means that the business is unlikely to be able to move for another 5 years. Not ideal when you have run out of space and your business needs to expand.
If you have not already done so, we therefore recommend that you enter your break notice deadline and lease expiry date together with some advance warnings into your electronic calendar. You should invite other colleagues to those events as well. If you have a portfolio then enter the lease data into a software package that includes SMS and diary alerts.
Conclusion
The precise drafting of your break option could have a huge impact on your business so please take it seriously and always have it at the front of your mind before you finalise the Heads of Terms with your landlord.
Needless to say, if you ever need advice on a break option or indeed the negotiation of heads of terms with a landlord, please call a member of the TAG team on 0161 457 1422 and they will ensure that your interests are fully protected.