Will Holliday, lease consultancy director at GVA Grimley Birmingham, offers advice on tenant break clauses and pinpoints exactly what to look out for when considering a deal.
It’s a fact leases have become significantly shorter over 20 years. In the forward facing economy of the late 1980s, the institutional 25-year lease was popular with firms looking to safeguard a prize property.
Today, being a ‘free agent’ is preferable to an eternally binding contract, meaning if a landlord requires a ten-year term, very often it is likely the tenant will wish to secure a mid-term break clause.
Tenant break clauses, which allow occupiers to terminate their lease early, have become increasingly common in today’s market. Cautious tenants are opting for a greater degree of choice and flexibility. This has distinct advantages for the occupier over a short term lease.
When considering which lease to choose it is important to weigh up the pros and cons of a short term lease against a shorter period of security of tenure. If a tenant has invested a lot of money fitting out premises, only to have the landlord object to the granting of a new lease, the occupier will be left with the cost and inconvenience of relocating. Although there are few grounds upon which a landlord can oppose the granting of a new lease, it does remain possible – the most common reason being redevelopment.
Take for example, a ten-year lease with a five-year break clause, compared to a short term, five-year lease. In both cases the tenant can vacate the property after five years, but the former enables the tenant to remain in occupation for a further five years, if they so wish, without the need to incur any legal costs in drawing up a new lease.
However, the five-year break clause is likely to include a simultaneous rent review, of which nearly all are described as ‘upward only’. This means the rent will either remain constant or increase, but cannot be reduced. At lease renewal, the parties must agree the “market rent” which can be less than the current rent. If you do opt for a break clause, the pitfalls tend to centre on a few key areas:
Lease Obligations: If parties agree to a break clause it is vital the conditions upon which the break can be exercised are carefully negotiated and set out in the lease. If it is agreed all lease covenants must be complied with, the tenant will have to ensure all repairing obligations have been met. A preferable alternative is to limit the tenant’s obligations to the payment of rent only. Tenants should be aware if the break date does not coincide with the rent quarter day, it is likely the full quarter’s rent will still have to be paid. It is questionable whether the tenant can then recover the excess rental payment from the break date until the end of rent quarter.