Break Clauses

Not necessarily an easy way out of a lease

and a certain way to an expensive

dilapidations claim if you get it wrong

 

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Lease break clauses overview

Many business owners take a lease with a break clause, thinking that if things don't go to plan, or go better than planned, then they will be able to leave the existing premises using the break clause, thereby removing the liability to have to pay rent, rate and any service charge for the property after they have a use for it.

Some business owners may even have a break clause as part of their business plan, where they project that they will expand in three, five or ten years time and therefore have break clauses at these points in time. If things are going to plan they move onto a larger property. In our experience break clauses are not as simple as they at first seem and very expensive if you get them wrong. In fact we recently read an article where it claimed that over 50% of the costs can be attributed, not to the dilapidations claim itself, but to the other charges that you have, such as the rent, rates and services charge if you fail to serve the break clause correctly.

 

Break clauses, the hidden dangers

With a break clause it is absolutely essential that you comply with the break clause fully to remove any future liability you may have with regard to rent payment and indeed the landlord carrying out the repairs for you and recharging you.

 

Compliance with the break clause requirements

We could give many examples of break clauses that haven't worked as they should do for the business owner/leaseholder. All of them ultimately boil down to the same thing, that the items within the lease to instigate the break clause, often known as the compliance items, are not complied with. Sometimes these may be oversights and sometimes they are misinterpretations. Whichever way, the non-compliance with the compliant items of the break clause means that the leaseholder continues with the lease and therefore has an obligation to continue paying the rent.

 

What the landlord things about break clauses

The landlord's view of a break clause, a cynic would say, could be an opportunity to bring the maintenance of the property up to standard. They may have decided to offer a break clause because the property was below standard or he could achieve a higher rent by offering a break clause. When one is due he is thinking that the income stream he has from that property may no longer exist. If he thinks the break clause is going to be invoked and that he will have problems re-letting the property then he will be looking for ways to ensure the break clause is not met. Therefore he could be difficult and awkward about the break clause.

 

Your break clause strategies

Whether you are the landlord or the tenant you need to think about the strategies you want to put in place and where you want to be with regard to the break clause. For example, if you are the tenant and you want to come out with the break clause you have to be absolutely 100% certain that you have met all requirements of the break clause.

 

Some examples of break clauses that went wrong

An example of a simple thing that meant a break clause was not complied with is a five year break clause that had a covenant to replace the carpets for the break clause to be instigated. In this case the carpet was cleaned and we are told looked as new, but nevertheless wasn't new. This meant that one of the compliance covenants for the break clauses was not complied with and therefore the break clause was not plausible.

Another example we could give is where all the building work type clauses were complied with but the keys were not returned. Therefore the break clause wasn't enforceable.

 

The break clause and business decisions

The above are extreme examples of the break clause not being complied with and normally a landlord will take a business view and generally, as long as he is able to rent the property out at a market rate and doesn't see future deterioration in the property assets and its leasing potential, he will take a business decision and consider this acceptable (but don't hold us to this, there are many landlords that will say a lease is a lease and if it isn't complied to then the break clause isn't plausible). Generally speaking we have found that most landlords will make a business decision to force a business to carry on paying the rent when they have, for example, bought another premises, or leased another premises, have closed down ready for retirement or simply caused very bad feelings, not only with the business owner/leaseholder who gets into financial difficulties, but also with the business communities.

 

Some examples of break clauses that were not enforced where important items were missed

Equally we can give you examples of break clauses that were not enforceable due to the leaseholder not taking the requirements of the break clause seriously enough, or even wrongly interpreting the requirements within the dilapidations.

Let us remind you that the dilapidations served by the landlord will give the element of the structure that doesn't meet the lease requirements and possibly give a repair method. However, it is the leaseholder that decides the repair method that meets the dilapidations or break clause requirement. In this particular instance the landlord's surveyor stated that the asbestos roof handles are damaged, which meant that they broke x, y, z clause of the lease and that should be replaced. However, he had effectively overstepped the mark of his role, but understandably so, as he was trying to get the best deal for the landlord.

In this case the leaseholder didn't challenge him or take advice from a surveyor with specialist knowledge in this area and decided replacing the damaged roof panels would simply be too expensive so didn't carry out any work, which then meant that he had not complied with the lease break clause agreement. If he had taken advice he would have known that in that instance it would have been insufficient to have made the asbestos sheets watertight and if they had affected the appearance internally under clad them. To a surveyor dealing in this type of work this should be basic knowledge.

We have produced a number of articles and book reviews on dilapidations, for more information go to:

Information on Dilapidations

 

Independent Surveyors

If you truly do want an independent expert opinion from a surveyor with regard to valuations, mortgages, mortgage companies, surveys, building surveys, structural reports, engineers reports, specific defects report, structural surveys, home buyers reports or any other property matters please contact 0800 298 5424 for a surveyor to give you a call back.

Commercial Property

If you have a commercial property, whether it is freehold or leasehold then sooner or later you may get involved with dilapidation claims. You may wish to look at our Dilapidations Website at www.DilapsHelp.com and for Disputes go to our Disputes Help site www.DisputesHelp.com

We hope you found the article of use and if you have any experiences that you feel should be added to this article that would benefit others, or you feel that some of the information that we have put is wrong then please do not hesitate to contact us (we are only human).

The contents of the web site are for general information only and are not intended to be relied upon for specific or general decisions. Appropriate independent professional advice should be paid for before making such a decision.

All rights are reserved the contents of the web site is not to be reproduced or transmitted in any form in whole or part without the express written permission of www.1stAssociated.co.uk

 

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