As UK businesses begin to establish a new normal in the post-pandemic era, the commercial real estate landscape is also undergoing its own transformation. Businesses that still practice flexible working are keen to renegotiate existing leases, inserting a break clause into agreements where possible. Karen Mason, partner at specialist real estate law firm, Newmanor Law, offers her advice to those business owners considering this course of action.
The first thing that tenants must keep in mind is that negotiating a new and improved lease is a complex process, and one that cannot be completed overnight. In addition to this, break clauses can be difficult to trigger, especially if they have not been carefully drafted.
That is why, business owners should seek professional support from the outset, as an experienced legal team will help them navigate the process carefully, ensuring they secure the best lease possible.
Uncertainty in the market
According to research from global property experts, CBRE, the downturn in real estate letting appears to be widespread, with office investment in the first quarter of 2021 down 65% on the previous quarter and 37% on the first quarter of 2020.
Whilst the adoption of alternate working patterns started before the pandemic, there is no question that Covid-19 and the resulting lockdowns accelerated the decline in demand for commercial property space.
This is the backdrop against which any consideration of the changing nature of commercial leases takes place, with the slump in overall demand for office space impacting on the kind of clauses tenants and landlords will be negotiating.
Negotiating an effective break clause
This uncertainty caused by the pandemic has led to more tenants utilising existing break clauses, whilst others rush to implement similar clauses in their new leases. Many will be seeking to take advantage of the drop in demand which landlords are experiencing to drive as hard a bargain as possible when negotiating their contracts, and that may include the introduction of a break clause.
As the vast majority of commercial leases run for five to ten years, inserting a break clause into these may offer more flexibility for tenants and landlords as it enables either party to end the lease early so long as certain conditions have been met.
For example, an organisation with a 10-year lease, might seek a clause to be inserted which will give them the option to exit the lease at any point after 4 years as long as six months’ notice is given.
As it stands, there is a lot of uncertainty when it comes to a demand for office space. For this reason, the inclusion of a break clause can be one of the main sticking points during negotiations between tenants and landlords, so it is vital that both parties take the time to understand what it entails.
The impact of a break clause
From the leaseholder’s perspective, a break clause will enable them to walk away from an agreement if the commercial space is no longer needed. On the other hand, these clauses will allow landlords to remove tenants, should there be a more profitable alternative on the table. Previously, tenants have been against giving landlords break options, but in the current climate, this could be mutual.
For the party seeking to trigger the clause, the tangible benefits are obvious, but taking this course of action is not without its own complications. The complex nature of the process means that both parties must consider the clause and mechanics for implementation carefully, as any future disagreement could lead to costly legal action.
Remember, the utilisation of a break clause could leave a landlord with the difficult task of having to re-let the property at short notice, so tenants could experience some resistance when looking to trigger a clause.
The Royal Institution of Chartered Surveyors published a ‘Code for leasing business premises, England and Wales’ in February 2020, which states that the break clause should only be conditional 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 …”.
It may sound straightforward, but in reality, many landlords insist on going beyond what is only a voluntary code and imposing stricter conditions. In many cases the landlord may attempt to link the triggering of the break clause with the wider covenants of the lease, such as the requirement to return the property in a specific condition, or to undo any alterations carried out during the lease term.
Disputes between landlords and tenants about the exercise of break clauses are very common. It is very easy for a tenant to get the exercise of even a very simple clause wrong. It would be wise, therefore, for any tenant uncertain of their compliance with conditions to employ the services of a specialist real estate lawyer or surveyor to closely work through the break clause and how it is to be exercised.
If the opinion of a specialist is that the conditions of the break clause cannot be met then the tenant might choose, instead, to negotiate a formal ending of the lease on terms which are agreed with the landlord. Taking advice early before exercise is key.
Triggering a break clause
One aspect of a break clause which all parties must consider are the details of how, when, where and to whom the notice is served have to be adhered to precisely. Tenants and landlords need to know that a break clause will be rendered invalid if the precise conditions outlined in the lease are not met. This could include all manner of things from the method used to give notice, down to the person who serves the notice, or who that notice is served on.
The tenant will also need to ensure that rent payments are made up to and including the break date, even if that means paying for a period which falls after any break will have taken place.
Seeking legal advice
One key detail to keep in mind, is that when a break clause has been triggered by a tenant, it cannot be legally revoked, even if both parties express they want to reverse the decision. Therefore, before taking any drastic measures, it is crucial that you assess the situation carefully.
When it comes to drafting a break clause, do not attempt to complete this process on your own, especially if you have no previous experience. Instead, consult a specialist team of real estate lawyers that will help you negotiate a new or revised lease along with a comprehensive clause.
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