Starting a new tenancy is a big commitment for businesses, but a break clause can provide commercial tenants with some reassurance that there is a way out if needed.
A break clause is a provision within a commercial lease that allows one or both parties to terminate the lease before the agreed-upon end date.
Typically, break clauses are included to offer flexibility to both landlords and tenants in responding to changing business circumstances.
A break clause can be actioned by either party, provided the specific conditions outlined in the lease agreement are met.
Importance for commercial tenants
Break clauses provide commercial tenants with flexibility, allowing them to adapt their business strategies in response to changing market conditions.
This can be particularly crucial in industries characterised by rapid developments or economic uncertainties.
Knowing that a break clause is in place enables tenants to manage costs effectively. They have the option to exit a property if it no longer suits their needs or if financial constraints arise, preventing them from being tied into a long-term lease commitment.
The existence of a break clause can also serve as a negotiating point during lease discussions.
Tenants may leverage the potential for an early exit as a way to secure more favourable lease terms or concessions.
Potential pitfalls for commercial tenants
Break clauses often come with specific conditions that must be met for termination to be valid.
These conditions may include providing a certain notice period, fulfilling repair obligations, or meeting rent payment requirements. Failure to adhere to these conditions can render the break clause ineffective.
Landlords may include financial penalties or ‘break premiums’ that tenants must pay to exercise the break clause.
This cost can offset some of the financial benefits of early termination, making it essential for tenants to carefully evaluate the overall impact on their budget.
Commercial tenants should also be aware of the existence of a break clause in favour of the landlord. In such cases, the landlord may terminate the lease early, potentially disrupting the tenant’s business operations.
Is a break clause right for you?
While break clauses offer valuable advantages, tenants must navigate potential pitfalls, including strict conditions and financial implications.
It is advisable for tenants to seek legal advice and the assistance of a building surveyor before entering into a lease agreement, ensuring a clear understanding of the break clause’s terms and implications in addition to your responsibilities throughout the tenancy.
Tenants may also approach a building surveyor when they wish to exit their tenancy to further understand their liabilities and help minimise costs.
In doing so, commercial tenants can make informed decisions that align with their business goals and mitigate potential risks associated with these clauses.
