Break options and clauses are a popular addition to leases of commercial properties; a handy addition to any lease agreement or contract in real estate that is beneficial for a landlord and tenant.
In the main, you see them most in regular lease agreements of commercial and business premises with a break option in there. However, they can still be within residential longer leases and shorter-term agreements.
What is a Break Option Clause?
When looking at what a break option clause means - they allow one party to terminate the lease agreement before the end of the natural term.
So, the lease may be five years long, however, a landlord or tenant may have the option to end or break the lease after say the third year.
But in terms of what does it means, a specific break clause and option agreement within the lease is a clause that describes the process of one of the parties ending the agreement. This can be just for a landlord or a tenant, known as a ‘landlord break’ or ‘tenant break’, respectively, or a ‘mutual break’ if both sides can do this.
There can be a ‘rolling break’ option clause in the lease where it's an ongoing time frame to action this rather than a specific date.
So, in terms of whether a beak option is mandatory, then it is in the sense that if it is in an agreement and one party correctly, ‘serves’ or actions the break option, then yes, it will be mandatory. However, there can be specific conditions that need to be strictly met too.
Plus, it's not necessarily mandatory to insist that a break option is, first, put in a new lease, which will be up to the negotiation of the parties unless being inferred by, say, the courts under a lease renewal under The Landlord and Tenant Act 1954 because it was in a former lease.
Therefore, an active break option clause means that it's still able to be actioned in the future. Although it is a legal requirement to comply with a break option clause already there, you don’t necessarily have to first include it.
How Does a Break Option Lease Clause Work?
When you look at how to exercise a break option clause, it boils down to what the specific clause in the lease says.
Once this is located, then you first then need to look at the time frames in here; not only the date of the break but the notice period to action it beforehand.
You may hear reference to things like a ‘six-months break option clause’, which will probably mean the notice period of six months to activate this and not necessarily the point in time when it can occur.
Regarding where to find a break option clause in the lease and how to find it, it's often a specific section towards the end of the lease agreement. However, it's also worth checking the beginning of the lease, which may summarise main terms and define certain elements such as a ‘break date’ or ‘notice’ period.
It would help if you then looked at the practicalities of how to serve notice in order to exercise the break option, which may state to who it has to be sent, at what address, and in what form, for example, registered post. Other clauses in the lease may prescribe how these notices have to be sent and can be the sort of detail that is missed, making a break option invalid.
Once done, it's not necessarily easy to then withdraw such break notice.
Even if the other party does agree, then there may be legal points about whether a whole new lease needs to be agreed then anyway.
The final part is to then look at the conditions and requirements in the break option, which may state things like payment of all due rent and monies. Also, ensure the property is empty and what they call ‘vacant possession', and ensure that it is fully in repair and any alterations removed by the tenant.
In short, when you look at whether a landlord or tenant can use a break option clause, and how long it is for or how effective it is, then it will boil down to what the clause states in the lease.
How Do You Use a Break Option Clause?
You first need to ask whether you need a break option clause actually inserted and why you should have one. They basically offer flexibility, maybe for a tenant who needs to relocate or change things before the end of the lease or a landlord who may have wider redevelopment plans for the property.
In terms of whether you need a break option clause, then, not necessarily. However, they can offer helpful flexibility.
So rather than commit to say a straight three-year lease, then maybe both parties could agree on a six-year lease with a break option after the third year to give that flexibility; but then not to have the complications of renewing the lease again in three years.
You also need to ensure they correctly link with other issues in the lease. For example, if there was a due rent review at the time, which would determine future plans, and maybe other options such as being able to buy the landlord's freehold.
With increasingly uncertain times from issues like the Covid-19 pandemic, they will become more popular to have in lease options with such break option clauses having certain triggers, such as reduced turnover for tenants or breaches of the lease.
How to Write a Break Clause in a Tenancy Agreement Before the Actual Lease is Drawn Up
They should be referred to in any initial heads of terms, which is basically a summary of the main points of a new lease agreement.
This should give all the detail like above, such as notice periods, dates, and conditions of the break option clauses. A good solicitor should have a commercial contract lease example that can be utilised. However, it's essential to make sure these are correctly drafted and reflect the reality of the situation.
Unfortunately, these clauses can be very strictly interpreted so that one small failure can invalidate the whole break, and a tenant or landlord is left with a longer lease than they wanted.
To Break or Not to Break
When looking at a break option or clause in a lease – after for commercial property – the key is to check the actual wording in the lease.
They’re often taken very literally, therefore, make sure details such as dates and notice periods, and conditions to exercise, are correctly documented and implemented.