Lease Break Clause: How a Tenant Exits a Commercial Lease

How a lease break clause works

A break clause is an option in the lease. It gives the tenant, the landlord or both the right to end the lease before the term runs out. A tenant break is usually tied to a date, such as the fifth anniversary, or to a rolling notice period.

The option is exercised by a break notice. If the notice is valid and every condition is met, the lease ends on the break date. If not, it carries on as if no notice had been served.

RICS guidance on dilapidations is blunt about this. If one condition is not met, the lease continues past the break date unless both sides agree otherwise.

A landlord's break works the same way in reverse. This guide is about the tenant's break, which is where most of the risk sits.

Tenant-only, mutual and rolling break clauses

Break clauses come in a few common shapes. Which one you have changes how much control you hold over the exit.

A tenant break clause is the one most occupiers negotiate for. Ask for as few conditions as possible when you take the lease. A break conditional only on paying rent and giving vacant possession is far safer than one tied to full compliance with every covenant.

Break conditions: rent, repair and vacant possession

RICS lists the conditions most often found in leases. Courts read them strictly, so "nearly met" counts as not met.

1. Notice by a stated date. The notice must reach the landlord in time, in the form the lease requires.
2. Payment of money. Rent, service charge, insurance and sometimes a break premium must be paid by the break date.
3. Vacant possession. The premises must be handed back empty of people, goods and anything the lease treats as yours.
4. Compliance with covenants. Some breaks also need the repair, decoration and reinstatement covenants kept.

Rent paid in advance is not refunded

Rent is often due quarterly in advance. If the break date falls mid-quarter, you may have to pay the full quarter to avoid arrears.

The Supreme Court looked at this in Marks and Spencer v BNP Paribas in 2015. The tenant paid a full quarter, broke the lease in January and asked for the rest back. The court refused to imply a term returning it. So unless your lease says otherwise, budget for the whole quarter.

Vacant possession means empty

Vacant possession is the condition that catches most tenants out. In Riverside Park v NHS Property Services in 2016, the tenant left partitioning, kitchen units, floor coverings and blinds behind. The court held that vacant possession was not given, so the break failed.

Leave nothing behind that the lease treats as yours: partitions, cabling, signage and stock all count.

Repair conditions are the hardest to meet

A break conditional on "material compliance" or full compliance with the repairing covenant is dangerous. The landlord can point to almost any defect. Where your lease has one, the dilapidations works become a condition of leaving, not just a claim to settle later.

Serving the break notice

Serving the notice is a legal task. RICS tells surveyors not to serve break notices and to leave them to the lawyer. That is good advice for tenants too.

The lease sets the rules for the notice. Many leases adopt section 196 of the Law of Property Act 1925. It treats a notice as served if left at the last-known place of business or sent by registered post. Others set their own address and method.

Check each point before the notice goes:

• the tenant named exactly as in the lease, or the current assignee;
• the landlord named and addressed as the lease requires;
• the break date and the notice period counted correctly;
• the method of service, with proof of delivery kept;
• any guarantor or group company that must also sign.

Serve early within the window where you can. A notice that arrives a day late cannot be fixed later.

Dilapidations when you break

A break ends the lease, but it does not end the dilapidations claim. The landlord can still send a terminal schedule and claim the cost of repair, redecoration and reinstatement after you leave.

Two different risks sit behind one break date:

1. Before the break: works the break conditions require. Miss them and you keep the lease.
2. After the break: works the covenants require. Miss them and the landlord claims damages.

For repair, the claim is capped by section 18(1) of the Landlord and Tenant Act 1927. Damages cannot exceed the fall in value of the landlord's interest. Nothing is due for repairs the landlord's plans to demolish or alter would make valueless.

That cap does not reach reinstatement or redecoration in the same way. So the items you reinstate before the break date often matter most.

Plan the works back from the break date

Most tenants need 12 to 18 months to plan a break well. Work back from the date:

1. Read the lease, every licence for alterations and any schedule of condition.
2. Get the exit works priced line by line, against what the lease actually asks.
3. Agree which alterations the landlord wants left in place, in writing.
4. Book the strip-out and reinstatement so they finish before the break date.
5. Clear the premises completely and return every key and access card.

Our own RICS-qualified quantity surveyor reviews the schedule and prices it line by line. The same team then does the reinstatement and strip-out, so the figure agreed is one we can deliver. Want a number before you serve notice? Get a free break review.

Break or surrender: which costs less

A break is a right. You do not need the landlord's consent, but you carry all the risk of the conditions. A surrender is a deal. Both sides agree to end the lease, usually by deed, on terms they negotiate.

A surrender can cost more up front but buy certainty. It suits a tenant who has no break date soon, or whose premises would struggle to meet a repair condition. Your solicitor drafts the deed; the works and the figure are where we come in.

Whichever route you take, price the works early. A landlord quoting a surrender premium is often pricing the dilapidations into it. A builder's figure for the real works gives you something to negotiate with.

Moving out and moving on, as one programme

A break date fixes when you must be out. It rarely lines up with the date your next premises are ready. Running the exit works and the new fit-out as one programme closes that gap.

For Drake's railway arch in Bethnal Green, we did the dilapidation works at the old warehouse. We also handled the full move into the new 500 sq m arch. At Beaumont House in Kensington, we refurbished 750 sq m of new offices in three weeks with five weeks left on the old lease.

One team, one point of contact: no surveyor, solicitor and three contractors to juggle on top of the move. What can be reused goes with you or is resold, and the rest is stripped out to what the lease asks.