You may want to take a long lease term to protect the long-term survival of the business you are intending to create, but then the other hand you may want to be able to cut your losses and bring the lease to an end early if things don’t go to plan.
The answer is a “break clause”. A typical break clause gives the tenants the right to end the lease on a particular date or dates – for example, on the second anniversary of the start of the lease, or at any time after a specified date.
The way that a break clause usually operates is that the tenants must give the landlords a set number of months prior notice in writing – such as, six months.
If the tenants miss the last date for giving notice, they lose their break right – unless they have a “rolling break”. A rolling break is a break right which is not limited to one specific date. With a rolling break, the right to break is either ongoing – for example, you can exercise a break right at any time after a particular date – or it recurs on specific dates – for example, on the third and fifth anniversaries of the start of the lease.
Landlords usually impose pre-conditions which have to be met in order for the break notice to be effective. It may be required that all rent and service charge payments have been made up to the date the notice is served, and/or at the break date itself. Sometimes – and this is a dangerous one for a tenant – the lease requires that the tenant must not be in breach of any obligations in the lease at the break. This is dangerous because, to give an example, one of the lease obligations might be to repaint the premises, which may not have been done because it wasn’t really needed. But it was still a legal requirement under the lease. Another requirement may be that the tenants give vacant possession of the property on the break date. Even leaving a few items behind might breach that obligation. So, it’s essential that when the lease wording is being finalised, your solicitors make sure that none of the conditions which could stop the break having effect are unfair or unreasonable.
A reasonable arrangement from your point of view would be that the only conditions imposed on your break are that rent has been paid and you have moved out.
If you negotiate an underlease for any reason, remember not to allow it to extend beyond the break date. If you can’t give vacant possession, because there is an undertenant in occupation, you won’t be able to exercise your break right. (Also make sure any undertenants whose underlease ends before the break date, have no right to extend their occupation beyond it.)
Sometimes, landlords will require tenant to pay a lump sum if they exercise the break, to give the landlord some compensation for the loss of its income stream, and to cover the period before a new tenant can be found. Landlords may even agree to give you a rent free period if you do not exercise the break clause to encourage you to stay.
There are some financial implications of having a break clause rather than merely a short lease. You have to pay stamp duty land tax or land transaction tax on the lease when it is created, and the longer the term, the higher the tax. You don’t get a refund for the future term which you are cancelling if you exercise the break. Your solicitors would be able to advise you on the amounts in question.
If you exercise a break, you would normally receive back any rent you paid in advance for for the period beyond the break date (if any). You would still remain liable after the break for service charge up to the break date, which will only be known precisely when the accounts have been prepared.
Break clauses are not only used by tenants. Landlords sometimes want break clauses as well. For example, if they are planning to redevelop the building, they might agree a lease with you, but with the proviso that they can break the lease by several months notice. Sometimes leases contain break clauses for both landlords and tenants.
An alternative to a break clause is an “option to renew”. So, instead of having a term which you can break early, you have a term you can extend. For some reason, an option to renew is not done so frequently. You need to be careful about the conditions applied to its use, just as with break clauses, as discussed above.