How to exercise a break option

As a tenant of commercial premises, you may have negotiated an option to break the lease early, just in case you outgrow the premises quicker than expected or your venture becomes no longer viable. Such an option may apply for a fixed break date or be exercisable on a rolling basis after a certain date.

If you need to exercise the option, you must do so strictly in accordance with the terms of the lease.  If you do not, the break might be invalid and you could be on the hook for the rents for the remainder of the term. Here are some guidelines on how to exercise a break successfully:

  1. Instruct a solicitor: They can check your lease and tell you exactly what to do and when to do it.
  2. Give notice correctly: Notice should be addressed and sent to the correct person at the correct address, sent by the correct person, in any form required by the lease and by a method permitted by the lease. Make sure notice is served in good time before any deadline – best not to leave it until the last minute and also any period specified for service to be “deemed” needs to be built in.
  3. Notice cannot be withdrawn unilaterally: You therefore need to be sure it is the right decision. If you and the landlord agree to waive the notice, a new lease will be deemed to be granted and this has potentially serious consequences. If you are looking to renegotiate with the landlord, the threat of a break may be enough.
  4. Comply with any conditions:
    1. Absolute conditions must be complied with to the letter. The lease will usually state at the very least that your principal rent must be paid up to date but often service charge and insurance rent need to be too. If the lease requires a payment to be made before the break covering a period and part of it falls after the break (e.g. a quarterly rent payment), you still have to pay in full. Only if the lease expressly says so will you be able to claim a refund for the period after the break. If any sums are in dispute, pay “without prejudice” and claim them back later.
    2. A payment condition can extend to “all sums reserved as rent” or “any other sums due”. This may include default interest on any amount paid late over the term, even if not demanded. You should carry out an audit of all payments over the term as case law has held that a break was invalid where £130 in interest was outstanding.
    3. The other usual absolute condition is to give “vacant possession”. This means that the landlord can physically and legally occupy it with undisturbed enjoyment. Breaches may include where there are lawful tenants or licensees or unlawful squatters in occupation, where rubbish or contents remain, or where workman are continuing to do your repairs.
    4. An absolute condition that all covenants have been observed means that any breach on the relevant date(s) could render the break invalid. Where such a condition requires “material” or “substantial” compliance instead, this means that the landlord should be able to re-let the property without delay or expenditure. Only limited minor breaches will therefore be permitted. “Reasonable” compliance will be judged over the whole term up to the break date.
    5. Compliance with covenants includes carrying out any repairs and decoration and removing any alterations you have made, as required by the lease. Consider a full review of the premises with a surveyor in light of your lease obligations. Whilst the landlord may not want to help you break the lease, you can ask it to prepare a schedule of dilapidations covering any items you need to deal with. Then you can be sure to carry out the necessary works in good time before the break.
  5. Keep evidence of your compliance: Retain evidence of posting or faxing the break notice and your payment records and audit. They will be useful if the break is challenged by the landlord.

These guidelines provide a summary of the issues to be considered. Legal advice on your precise circumstances is recommended and a review of the lease terms is essential.

Charles Hylton-Potts