COVID-19: The importance of checking the break clause in a commercial lease

The Government has issued guidance for commercial landlords and tenants to cooperate and work flexibly to ensure that businesses are supported and protected from the effects of the pandemic.

At present, a landlord is prevented by law from either forfeiting a lease, instigating CRAR (commercial rent arrears recovery), instigating the statutory demand process against limited companies, or issuing proceedings to wind up a tenant company.

A tenant is not excused of paying any part of the rent or any other monies due under the lease.

What if a landlord is intransigent and the tenant cannot meet the landlord’s demands and trade profitably? The tenant will want to find an exit from the lease.

This will depend on whether a break clause exists in the lease. Such a clause will normally allow the tenant (and sometimes the landlord also) to bring the lease to an end prematurely. However, the clause is interpreted very strictly, and the tenant must comply with any conditions in the break clause itself and in relation to the service of notices, which will include notice of the break clause.

For example, a common condition in a break clause is that the rent must be paid up to date at the time the notice expires. This may include the whole of the latest quarter’s rent immediately prior to the break date (the date of expiry of the break notice).

More strict conditions imposed are that at the break date, the tenant must not be in breach of covenant. The tenant must, in good time prior to the expiry of the break notice, review the condition of the property to ensure that all maintenance and repair covenants are complied with.

A common requirement for the service of notices is that, they must be sent by recorded delivery mail to the landlord’s address stated in the lease itself. If the landlord has ceased to use that address, the tenant must still serve the break notice at that address, although for good measure, the tenant should serve on all other addresses of the landlord that are known to the tenant.

A phrase that has grown up in case law is that the tenant must find “the key to the door” to exit the lease. The precise letter of the relevant clauses in the lease must be followed.

If a tenant achieves early termination of the lease, this does not absolve the tenant from liability for any past breaches of the lease terms.

If you need any further advice or assistance on operating a break clause or, for landlords on receiving a break notice, please contact Simon Tucker.