Breaking bad: A tenant’s guide to break rights

For tenants, understanding and effectively exercising break rights is crucial. A break right gives a tenant flexibility to end a lease early, but usually certain conditions must be met. It can serve as an important exit route if the premises become unsuitable. This guide will walk you through the essentials of exercising break rights.

What is a tenant break right?

A tenant break right is a contractual mechanism allowing the tenant to prematurely terminate a lease before the term expires, usually on a fixed notice period (i.e. six months' notice).

A tenant may need a break right to retain flexibility and meet changing business needs. For example, a tenant may need the ability to relocate if the premises no longer meet their requirements or become unaffordable owing to fluctuations in the market or a business restructure.

Break rights can be:

• Fixed; allowing termination on one or more specific dates; or
• Rolling; exercisable any time before or after a certain date.

A break right is sometimes personal to the original named tenant.  In such cases, on an assignment of the lease, the incoming assignee will not benefit from the break right.

Serving a break notice has serious legal consequences. Once validly served, a break notice cannot be withdrawn, even if both parties later change their minds.  Furthermore, if a tenancy is within the security of tenure regime under the Landlord and Tenant Act 1954, service of a valid break notice by the tenant may terminate the statutory protection. Conversely, service of a valid break notice by the landlord will not terminate a tenant's statutory protection, and to bring the lease to an end the landlord will still need to prove one of the grounds prescribed by that Act.

Service of a break notice

To exercise a break right, the tenant must ensure they serve a valid break notice. The lease will typically prescribe:

• by whom and on whom the break notice should be served;
• the specific method to be used to serve the break notice; and
• the timescale within which the break notice must be served.

Failure to comply with these conditions will render the break notice invalid. The tenant risks losing the right to break completely and being committed to the lease until the term otherwise ends, so it is vital to ensure that the break notice is compliant with all lease requirements and is served validly.

Form of a break notice

Usually, a break notice must be in writing (an email will not be sufficient). There is no universal precedent for the wording of break notices, but the lease may require a specific format or wording.

The key is clarity; the break notice must explicitly state that the tenant is exercising their right to break by reference to the relevant clause in the lease.

Service of the break notice is usually subject to various formalities which must also be complied with for the notice to be validly served.

Tenant break clause conditions

Tenants must carefully review the terms of their break clause to ascertain if there are any conditions which they must comply with to successfully exercise their break.  Well advised tenants will seek to minimise any conditions when they negotiate their lease, as strict compliance with any conditions is necessary to validly exercise a break right.  Conditions requested by a landlord might include:

Vacant possession

If the lease requires vacant possession of the premises as a condition to the operation of the break clause, the tenant must hand back the premises free of people, possessions, personal belongings, and legal interests, such that the landlord could reoccupy the premises itself or let to a new tenant immediately. This is a very difficult requirement to satisfy; Leaving small pieces of furniture or rubbish can invalidate the break, however, removing too much from the premises can also constitute a breach. Vacant possession can also require all alterations carried out by the tenant to be removed, but it is worth checking this with the landlord before any removal is done in case the landlord wants to retain them for the next tenant or wants to request that removal is handled a certain way.

In Capitol Park Leeds plc v Global Radio Services Limited [2021], the Court of Appeal had to decide whether a tenant had gone too far in providing vacant possession as required by their pre-condition to exercising the break. The tenant had emptied the premises of everything, including the landlord's own fixtures and fittings. The judge at first instance held that the tenant had not given vacant possession, but the Court of Appeal reiterated that leaving a property with vacant possession means leaving a property free from "people, chattels and interests" (the so-called "trilogy"), not necessarily returning the premises to a specific physical condition and so vacant possession had been given. Instead of having any right to challenge the exercise of the break, the landlord retained the right to claim damages for breach of covenant after expiry of the lease (which they chose to pursue).  

A common compromise position agreed in break conditions is to resist any reference to a requirement for vacant possession, but to agree that the tenant must give up occupation of the premises must deliver the premises back to the landlord free of continuing underleases or other third-party rights of occupation.

No subsisting breach

The lease may require the tenant not to be in material breach of the lease covenants at the break date, especially in relation to rent, repair and maintenance. 'Material' is generally understood to mean a substantial breach of the specific covenant, so if such a condition is contained within a break clause efforts should be made to remedy any breaches prior to exercising the break rights to avoid issues later. However, as it is very difficult to be objectively certain that there are no such breaches in existence, well-advised tenants should resist inclusion of a break condition relating to subsisting breaches.

Payment of rent

The break clause may require the tenant to have paid all rent and any other sums (including interest, insurance payments, and service charge) due under the lease. Even small arrears or historic late payments can invalidate the break so tenants should calculate and pay any sums due to the landlord before the break date.  Note that a condition requiring all sums due to be paid, means they must be paid even if they relate to a period after the break date.  There is no automatic right to a refund of sums paid in relation to the period after the break date unless it is expressly included in the lease. Well-advised tenants should therefore always seek to negotiate an obligation on the landlord to refund all sums paid in relation to periods after the break date.

A common compromise position is to agree that only the annual rent (and any applicable VAT) must be paid as a condition to valid exercise of the break right.

Payment of a break penalty

The break clause might require the tenant to pay a specified additional sum to the landlord in order to validly exercise the break right. The clause must be reviewed carefully to ensure that the correct sum is paid at the right time.

Where the conditions are not satisfied, the lease will continue with the tenant liable for ongoing rent and dilapidations.

After the break date

Even where a break clause has been validly exercised, a tenant is usually required to return the premises to the landlord in an agreed state of repair as required by the lease. Landlords may pursue a tenant for disrepair or failure to reinstate the property by engaging a chartered building surveyor to advise on any repairs required and make a dilapidations claim against the tenant.

If the tenant's break notice is effective and any break conditions are complied with, the lease will end on the break date, and any dilapidations claim by the landlord must relate to breaches up to the break date. If the break is invalid, the lease will continue in accordance with the contractual term.

Tenants are advised to start planning up to a year before the break date to rectify any issues proactively, engage the help of legal and building professionals to assess risks early, and ensure they have meticulously complied with all break requirements.

Conclusion

Break rights are a valuable tool for tenants, but they are rife with formalities and easy to get wrong. Our experts provide clear, practical advice to ensure break clauses are negotiated effectively, notices are validly served, and conditions are properly met, minimising the risk of disputes arising later. If you or your business are considering exercising a break or you have any questions about break rights, get in touch with our team and we will be happy to discuss this with you further.