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Pause for this clause

Karen Mason provides invaluable advice about how to agree a suitable break clause during a
period of widespread flexible working.

WITH most of the Covid-19-related restrictions having now been lifted, the UK is slowly adjusting to a new working normal in the post-pandemic era.

This has also caused the commercial real estate landscape to undergo a transformation of its own, as the emergence and popularity of flexible working patterns means that many business owners are keen to renegotiate their current leases and include break clauses in future agreements.

However, negotiating a new and improved lease isn’t a straightforward process, and it can be even more difficult to trigger a break clause if needed. For this reason, business owners should seek professional advice early on, so they can steer clear of potential issues later down the line.

Uncertainty in the market
As it currently stands, the downturn in real estate letting appears to be widespread, as research from CBRE, shows that office investment in the first quarter of 2021 was down 65% on the previous quarter and 37% on the first quarter of 2020.

Alternate working patterns, and a general acceptance of flexible working, were already beginning to emerge pre-pandemic, but there’s no doubt 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
Given the difficulties faced since the start of the pandemic, it should come as no surprise that an increasing number of tenants have been tempted to utilise existing break clauses, whilst others are trying to insert them into new leases.

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 to insert a clause which will give them the option to exit the lease at any point after 4 years as long as six months’ notice is given.

Currently, there is a lot of uncertainty when it comes to a demand for office space, which is one of the main reasons why negotiating a break clause can be difficult for both parties.

The impact of a break clause
As a leaseholder, a break clause will enable you to walk away from an agreement if the commercial space is no longer needed. Equally, landlords can use them to remove tenants should there be the potential to raise rents or make more money from a new tenant.

Whilst a break clause can have tangible benefits for the party seeking to utilise it, the process itself is far from simple. As such, it is imperative that both parties consider the clause and mechanics for implementation carefully, because any disagreement can lead to expensive and time-consuming legal action.

From a tenant’s perspective, they must realise that triggering a clause will leave the landlord with the task of having to re-let the premises at relatively short notice, so the landlord will usually look to resist exercise of any break clause.

Common disputes
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 …’

This sounds relatively simple, but the reality is that many landlords insist on going beyond what is only a voluntary code and imposing stricter conditions.

Disputes between landlords and tenants about the exercise of break clauses are very common. 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.

Seeking legal advice
One key thing for tenants to remember is that once a break clause has been triggered, it cannot be legally revoked, even if both parties have changed their minds. This means any potential decision must be given careful consideration beforehand, as it could lead to serious headaches later down the line.

Therefore, legal guidance should be taken from the outset, so a thorough break clause can be drafted, allowing both parties to fully understand the agreement and what it entails. Remember, negotiating a clause can be complex, so an experienced team of lawyers will help you reach a positive outcome quickly.

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