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A constant source of debate in clients acquiring properties on lease is the negotiation of longer lease terms accompanied by break clauses. This note sets out why we will always urge clients to be cautious about such arrangements.
A tenant signing a new lease must act on the assumption that he will be liable for the full rent for the full term.
A lease will often have 30 or 50 pages of legal obligations and rights. Of these, one or two pages will describe the duties of the landlord, and often 20 or more pages will describe the many and varied duties of the tenant.
It is fairly well settled case law that a break clause can only be exercised by a tenant if the terms of the lease have been complied with exactly by the person who issues the break notice. If therefore the tenant is in breach of even one small obligation, the break notice can become ineffective. Because of the complex situations in which such notices are issued, the ability to remedy the defect in the lease may be unhelpful, since the date for service of the break notice may have passed. If this happened the tenant then remains committed under the lease for the rest of the term.
In practice it is only be the most rare of situations that a tenant was indeed complying with each of his obligations under the lease.
Break clauses are negotiated because a tenant may want the security of a longer term, but is unsure of the survival of the business over that longer term and wishes for example to give himself the opportunity to pull out if necessary. Our advice is that a break clause is inappropriate for this purpose. The better way to do it always is to go for a short lease in the first place. If the lease is managed properly, the tenant will then have the right to a new lease in any event and the same result is achieved without the risk of the commitment.
Break clauses can sometimes be negotiated (and the attempt ought to be made if not offered) so that the tenant is required only to have achieved 'substantial' compliance with the lease. This is still by no means a perfect solution. It is vague - what constitutes 'substantial compliance'. It is a commonplace of legal practice that certainty is very often very much cheaper than uncertainity. The potential landlord bears a smile and has a friendly welcoming hand shake. The landlord threatened with losing his rent cannot be expected to maintain the same smile.
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