Food & Beverage Update: Commercial Leases – I Want to Break Free
13 September 2018
It is quite common for commercial leases to have clauses entitling the tenant or in some cases, the landlord, to terminate the lease subject to satisfying certain criteria. These are more commonly known as break clauses.
From a tenant’s point of view, a break clause is an advantage as it gives it the option of walking away from a potentially long lease and the obligation to pay rent and related outgoings under that lease. This may be crucial in the event of its business not working out as originally planned, or if the tenant has located a premises in a more advantageous location or on better terms.
Compliance with the terms of the break clause within the lease is critical. It is important that the terms of the lease and break clause are clear and it is agreed what conditions must be complied with before the break clause may be exercised.
Key aspects of a break clause include:
A tenant will ordinarily have to serve 3/6/12 months’ prior written notice on the landlord before it may exercise the break. This is known as a break notice. It is very important for tenants to set reminders in advance of the relevant date approaching. The tenant should also ensure that it serves the break notice in the correct name and to the correct landlord entity. For example, in instances where the break notice is being served on a company, tenants will need to be mindful that there may have been restructuring since the date the lease was signed and, as a result, the landlord entity may have been changed. Landlords may also want to engage an agent and seek legal advice in advance so there is no delay in re-letting the property.
Is the tenant obliged to make a penalty payment at the same time as serving the break notice or to just pay the rent. and other service charges or insurance, payable under the lease for the duration of the notice period? Failure to make the payment(s) will invalidate the tenant’s entitlement to exercise the break clause. The lease must be drafted in such a way that the amount of the payment due is clear or easily calculated. The tenant should ensure that any arrears of rent, insurance or service charge are paid up in advance of the break notice being served. If not, a landlord could claim that the tenant’s obligations under the lease were not complied with on that date, which could jeopardise the break clause, depending on the wording of the lease.
Yield up and repairing obligations
It is important that the parties to the lease consider not only the break clause but also the repair and yield up clauses in the lease. The state in which a premises is handed over on the date of termination of the lease will determine if the landlord has a claim against the tenant for breach of covenant.
A prudent tenant will instruct a surveyor to inspect the premises having regard to the obligations in the lease, including any appended schedule of condition or side letter or variations, to determine if they have complied with their obligations.
A prudent landlord will instruct its surveyor to do the same in advance of the tenant vacating the premises under a break clause. The landlord’s surveyor will advise if there is merit in any claim and prepare a schedule of dilapidations, which will then be served on the tenant. This will specify the areas of non-compliance and estimated costs of carrying out repairs. The tenant will have its surveyor review this and, unless it wishes to challenge the assertion it is not in compliance, it will have the option of paying the landlord in lieu of making the repairs or carrying out the repairs itself. If the repairs delay the landlord in re-letting the premises, it may also claim rent from the tenant during this period.
It is a standard requirement in a commercial lease that the tenant must hand over vacant possession of the premises on the date of expiry of the break notice. This is known as the break date. The term ‘vacant possession’ unusually is not defined under Irish law but is the subject of much case law. In practice, it means the tenant delivering up the premises unoccupied with all its equipment and contents removed. It also ordinarily requires the tenant to remove all of its fixtures & fittings, including any improvements, save those which the landlord has communicated to the tenant may remain in the premises.
A landlord may be entitled to claim that vacant possession was not handed over if the tenant has done something or caused something to impact the use of the premises by the landlord or a potential tenant. If the tenant is carrying out works to the premises on foot of its repairing obligations or otherwise, it must ensure any contractors or agents have vacated the premises in advance of the break date unless expressly agreed with the landlord in writing i.e. a licence for works.
If there is a dispute between the parties, the court or arbitrator will strictly interpret the terms of the lease as they are drafted. Only if the terms are ambiguous or uncertain will they also consider the intention of the parties by reference to the heads of terms and any correspondence at the time the lease was put in place. This emphasises the importance of getting the lease right from the start so that it reflects the commercial deal.
Top tips for tenants
Tenants should seek that a break clause only contains conditions that are clear and capable of being satisfied. Decline the insertion of ‘all covenants in the lease must be complied with’ prior to the break being exercised. Depending on the bargaining power of the parties, it should be sufficient that the tenant covenants to pay rent and any other payable charges up to the break date and serves the break notice in accordance with the relevant time period. In terms of dilapidations, start the conversation early and both parties should ensure a schedule of condition is carried out and agreed at the start of the lease. This should limit disputes at the end of the lease by providing a visual record of the state and condition of the premises at the time the lease is granted.
The content of this article is provided for information purposes only and does not constitute legal or other advice.