Wake-up call: Can you break a fixed lease early to move to bigger premises?
Tenants should agree special conditions with a landlord if they want the option of flexibility when starting a business, says Claire Timmings
You are looking at taking a new lease of a restaurant in a good location and the landlord wants you to sign up for a minimum of 20 years. You are concerned because you are just starting out and such a long commitment could be a problem if things don't go as well as you hope. Someone has mentioned to you the possibility of having a right to bring the lease to an end early. Is this possible?
The law
You can include a specific contractual right to end the lease early, and this will usually be by reference to a fixed date, for example, the fifth or tenth anniversary of the term, and may be subject to certain conditions, which will be a question of negotiation.
As a tenant, you should be looking to minimise the conditions you have to comply with and only agree to those that you will be able to easily satisfy, as conditions on a break clause are strictly construed. Conditions such as having to materially comply with the terms of the lease up until the break date, or to pay all sums under a lease where this could include interest and other payments, should not be agreed.
Expert advice
It is especially important when starting up a new business that you have the flexibility you need. Should your business plan or requirements change you may, for example, need to relocate to different premises, making your current location redundant.
A break can also be useful because, in a bad market, you could use it as a means of leveraging better terms from the landlord.
When agreeing a break clause, you must try and agree a break with no conditions or only conditions that you can comply with. Acceptable conditions are that you have paid your rent up until the time of the break (as you will know what that sum is) and that you will give up the property free of occupiers.
To agree to give vacant possession can be a problem as the landlord could require a last-minute strip-out of any fit-out and there could be uncertainty as to what you have to remove. And if you leave any items in the property in breach of the requirement, that could prevent you from exercising the break.
To-do checklist
Some tips in negotiating any break clause:
- Never agree a mutual break, ie one that is also exercisable by the landlord as well, as otherwise the landlord could seek to terminate early and you would have no control over this.
- Agree a break and any conditions at heads of terms stage and with dates that will suit your requirements. Try and link the dates so they are before any relevant rent payment or review dates so you know what to pay and when.
- Never agree a break condition which requires you to have materially complied with the lease covenants, or to have paid all sums under the lease. If you agree such conditions, the break will be fairly meaningless as the landlord could insist on every condition being satisfied before you can terminate the lease.
- Always make sure your solicitors agree a refund clause in the break. If you do not agree this, then any rent or other sums paid in advance are not refundable by the landlord.
Beware
When break clauses have been successfully negotiated, they can prove a very useful tool for a tenant who is looking at flexibility for their business or who may try and seek improved lease terms in a bad market.
A badly-worded break with onerous conditions is not worth the paper it is written on.
Claire Timmings is a retail and leisure property lawyer at Charles Russell Speechlys LLP
