Whether you are a tenant or a landlord, the details of your lease are there to protect you, so it is important to understand what a break clause is and how it could be used.
If a break clause is added to your lease, it effectively means that either party has the right to end the lease early. Currently these break clauses are being used by tenants who are looking to re-negotiate more favourable lease terms in order to take advantage of uncertain landlords who are keen to maintain their income stream.
The letting market
With an increased focus in helping more people to buy their own homes, the letting market is not what it once was, and landlords are increasingly anxious. When this is coupled with tenants feeling the pinch of challenging economic conditions, it is not surprising that the break clause is being invoked more and more.
Some conditional break clauses require the tenant to have met certain conditions by the break date, and so litigation has begun to creep in.
Serving the notice
All break clauses are different, and so some may specify how the notice must be served. It may also impose specific requirements as to the method in which this is done. Any failure to adhere to the requirements will invalidate the notice, and once it has been served, it cannot be withdrawn.
As a tenant, you should check the details of the parties involved with the Land Registry and Companies House, as well as looking at the details of the lease closely. You need to be aware of whether the service provisions in the lease are mandatory, and if there is any doubt, use multiple methods to serve the notice to both the landlord and agents to cover yourself. You should also make sure to obtain proof of the service of the notice for your records.
Landlords should make the effort to keep close to their tenant in order to pre-empt an occasion where they may wish to serve the notice, so they are in a better position to re-negotiate terms before it happens and before the tenant is no longer in the property.
When to serve the notice
The option of when to use the break notice will depend on a number of factors. This may be after a certain period of time has elapsed or there may be specified dates when it can take place. It is important that this is absolutely clear in the terms of the lease, and the terms of the notice period should also be unambiguous as to whether it is a minimum period or a specific one.
Tenants should record the dates specified in the clause and aim to review their options at least a year before the notice period commences. If you are unsure of the dates of the break clause, you should seek clarification and invite the landlord to agree to the date. Do not leave anything to the last minute, and serve multiple notices if you need to. If your landlord is an overseas company then you should allow plenty of time for service from them.
As a landlord, a good relationship with your tenant will allow you to anticipate whether a rent increase will lead them to invoke the break clause, and gives the chance to decide whether to invoke the increase. If you decide to do so, it is worth checking for any time limits in the rent review clause that you may need to comply with if the review date is linked to the break date.
Conditions of a break clause
The conditions of a break clause are usually found in the tenant’s break clause and can include details such as whether the tenant must have paid all of the rent due under the lease. Much litigation has taken place regarding these kinds of details, as it needs to be clear what the tenant is required to pay should the break date fall between quarter days.
All tenants should take care to check whether the lease refers to principle rent or includes other charges such as VAT or interest. Be aware of your payment history and ensure that the interest on any late payments has been paid, and settle all invoices as soon as you receive them. It is advisable to obtain confirmation from your landlord that all payments are up to date as these can be argued after the break date. When you negotiate your lease, you should ensure that the landlord is required to refund any rent paid for the period after the break dates.
Landlords should avoid drawing up any completion statement unless you are required to do so by the lease.
Vacant possession does not just mean that the property is unoccupied, it means ensuring that all the tenants goods and fixtures are removed, keys are returned and no-one is in occupation on the break date. The tenant should ensure there is nothing that may suggest they are continuing to use the property or interfere with the landlord’s use of the property.
Tenants should be aware of any works that needs to be carried out in order to give up vacant possession and invite confirmation from the landlord about what work they require. Landlords themselves should ensure that the tenant is given notice to reinstate alterations.
These covenants usually require the tenant to have reasonably complied with their obligations, particularly in relation to the state and condition of the property. Tenants should complete a compliance audit with a surveyor to make you aware of any breaches of your lease covenants and give you chance to fix this. Your landlord should be able to provide you with a schedule for any repair works, which should ideally be settled before the break date.
It is possible that a financial settlement will be needed in advance of the break date to cover repair work and release the tenant from break pre-conditions. This provides certainty that the lease will end on the break date and any repair settlements can be negotiated fully.
Agreeing on a settlement can make the final stages of a break much easier to get through for both parties and should be approached as early as possible.
Whilst a break clause might seem like something to dread, if it is written into a lease with sufficient clarity and detail, all parties should know what is required, and it should make the process a much easier one.