In this article I’ll talk about how lease break clauses work, some common pitfalls, and how to avoid them 

So, a while ago, I signed up to one of those meal kit home delivery services, convinced that I’d soon be whipping up delicious home-cooked delights. Yes, it was a bit pricey, and no, I couldn’t be sure that I’d always find time for it. But what clinched it for me was the promise that I could “cancel at any time”. What could possibly go wrong? 

Fast forward a few months and despite my attempts to cancel, I found that my cupboards were still filling up every week with expensive ingredients which I would never use. Turns out, cancelling a contract can sometimes involve more hurdles than an Olympic stadium. 

This problem often crops up with tenants’ break clauses. Any conditions in a break are “strictly interpreted” by the courts – which means that if you don’t fully comply, then your break will fail. If the break is too conditional you can find yourself locked in for longer than you anticipated. Just like me with that meal kit service. 

What Conditions Should A Break Clause Have? 

The perfect break, from the tenant’s perspective, would be entirely unconditional:- 

“The Tenant may terminate this lease on the Break Date by giving the Landlord at least 6 months written notice” 

But that’s perhaps a bit too tenant-friendly. The 2020 RICS code for leasing business premises strikes a good balance by suggesting:- 

“…a tenant’s break should be conditional only on the tenant:- 

• paying all basic rent payable on any date before the break date,  

• giving up occupation and leaving no subtenants or other occupiers.  

Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.” 

If the break is only conditional on payment of basic rent, even a child could understand what needs to be done. Note that “basic rent” means that I don’t have to pay service charge or insurance if they’re described as “rent” under the lease. 

Another pitfall is that when exercising a break, tenants sometimes think that they only need to pay the rent up to the break date. For example, if the break date is 31 March, they might pay only 7 days rent on the March quarter day. That’s wrong. You must pay the full quarter’s rent as normal. The landlord will refund the balance after the lease ends.  

Comply With Covenants? 

One of the conditions I used to see a lot in the old days was:- 

“…PROVIDED THAT the tenant has complied with all its covenants in this lease as at the Break Date” 

This was such a huge trap that it’s hardly ever used today, because everyone knows that it makes the break too conditional. For example, if there’s a loose tile on the Break Date, a “strict interpretation” could mean that you haven’t complied with your repair covenant, and your break would fail.  

Sometimes this is watered down to say that the tenant has to have “substantially” or “materially” complied with its covenants. That’s a bit better, but there’s still potential for argument. It’s a gamble you don’t want to take. 

From the landlord’s perspective, he doesn’t want the property returned in disrepair. But that’s what the terminal schedule of dilapidations is for. Most leases allow the landlord to serve that up to 6 months after the lease has ended. But in practice, many landlords serve it around 3-6 months before the break date and negotiate a settlement with the tenant. This ties in with the guidance in the RICS code mentioned above:- 

“Disputes about the state of the premises, or what has been left behind or removed, should be settled later” 

Vacant Possession vs Giving Up Occupation 

Here’s another interesting condition, which is still a common pitfall:- 

“…PROVIDED THAT the tenant must give up vacant possession on the Break Date” 

At first sight, this doesn’t seem problematic. There’s many a tenant lawyer who will have accepted it, with the advice that “vacant possession” means clearing out your people, your rubbish, and your belongings (furniture, computers, etc) so that the landlord can “enjoy possession, occupation and control” of the property. But “vacant possession” has a technical legal meaning which has led to many costly break failures. The 2016 case of Riverside Park Ltd v NHS Property Services Ltd, showed just how strict a strict interpretation of “vacant possession” could be. The premises had started off as open plan, and tenant had put up partitioning. On the break date, the tenant left the partitioning in place, on the assumption that it was a fixture, and therefore no longer classed as “tenant’s belongings”. The court disagreed. On the particular facts of the case, the partitioning was treated as tenant’s belongings and it was decided that the tenant had failed to give up vacant possession. The break failed. 

Another case on this point is NYK Logistics (UK) Ltd v Ibrend Estates BV. Two worker remained on site carrying out repairs after the break date, and a security guard was kept on patrol. The court decided that it hadn’t given up vacant possession. The break failed. 

Once you see what a minefield “vacant possession” can be, you realise why the RICS guidance avoids the term. “Giving up occupation” is more forgiving. It generally means you’ve left the premises and handed back the keys. If belongings are left behind, the break still works, but you’ll be charged for removal when the schedule of dilapidations is served. 

Again, a “vacant possession” condition is sometimes watered down with “substantially” or “materially”. It’s better, but it still leaves potential for an argument that no tenant wants to have. 

The Takeaways 

1. Conditions in break clauses are strictly interpreted. 

2. If you’re a tenant negotiating heads of term for a lease, the only conditions you should ever agree to are payment of rent and giving up occupation. 

3. If you’re already signed up to a lease which has any other conditions in the break clause, seek legal advice.