The most fundamental piece of advice when it comes to break options is that you should minimise their conditionality. Otherwise you risk not being able to operate them successfully which could prove costly.
It is also imperative that the drafting of the break clause is agreed at the heads of terms stage. There is no point leaving it for the lawyers to agree the detail between themselves. By then, it will be too late and your landlord will have the upper hand as you start to plan and pay for your move.
What minimum conditions are reasonable?
In our experience, most landlords still insist on highly conditional break clauses even when other legal remedies exist for them to secure damages against a tenant that has failed to observe a lease obligation.
Landlords are aware that even a minor technical breach is likely to cause the tenant’s break to fail. For example, suppose a tenant’s break option stipulated that it must ‘yield up the premises with vacant possession’. If the tenant had left a solitary waste paper bin in the corner of an office when it vacated the property, its’ break option would technically fail. This would mean it 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 the tenant!
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 before the break date; and
B) the tenant should have paid all the Principle Rent that is due.
Any other technical requirements such as payment of ‘Rents’, ‘insurance rent’ or ‘compliance with lease covenants’, are fraught with danger from the tenant’s point of view and should therefore be resisted 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 missed, 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 his lease it became apparent that he had missed the deadline for serving his break notice. In fact, he had missed it by just one day. This means that the business is probably stuck where it is for another 5 years. Not ideal when you have run out of space and your business needs to grow!
If you have not already done so, we therefore recommend that you enter your break notice date and lease expiry date together with some advance warnings into your electronic calendar and invite 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.
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 agree the Heads of Terms.
Needless to say, if you ever need advice on a break option or a lease expiry event, please call a member of the TAG team on 0161 457 1422 and they will ensure that your interests are protected.