Leases - breaks are common but what about options?
Since the financial crash in 2008, commercial leases have become much shorter in length. In the 1980s, 25 year commercial leases were common, before 2008, 15 year leases were common. During the financial crash, 3 year leases were common. As confidence and the market has recovered since then longer leases are more usual but so are break clauses, which allow the landlord, or more typically, the tenant to end the lease early.
After 2008, tenants with leases pre-dating the crash found themselves paying pre-crash levels of rent, when the market rent was often considerably lower. It was extremely common for tenants to exercise any break clauses to get out of such high rent paying obligations. Unfortunately for tenants, break clauses usually have conditions attached, and the older the lease the more difficult those conditions usually were.
In recent years there have been numerous court cases of tenants attempting to exercise their break clauses and landlords successfully arguing that the conditions haven’t been complied with and so tenants have been stuck with the lease at a high rent:
Break clauses often used to require compliance with tenant obligations in the lease – the courts have decided that it is almost impossible to prove this and so any break that requires this is almost certainly going to fail.
Break clauses often contain an obligation to provide vacant possession – tenants often think they’ve given vacant possession not realising that leaving behind internal partitioning they installed can mean they haven’t given vacant possession and so a break clause fails.
Breaks often contain an obligation to pay all rents. What tenants don’t realise is that “rents” usually includes not just the headline rent, but insurance and service charge payments and even interest on late payments (even if the interest has never been demanded) – and so that is another reason a break clause fails. Even if a tenant pays everything it owes, it may still end up paying rent for the period after the break date to the next usual rent payment date and not getting a refund.
Break clauses can be fraught with uncertainty for tenants and lead to unnecessary tax costs. Stamp duty is payable on the total rent that is payable over the duration of the lease. There is no refund of stamp duty if the lease is broken early.
An alternative is to have a lease which lasts until the point at which there would be a break option, and then an option for a longer lease after that. There are two significant benefits
- Certainty they can get out of the lease at a fixed point, whilst knowing they have security of the longer time period if required; and
- Only paying Stamp duty on the rent the tenant actually pays.
With Brexit’s approach, tenants are likely to want to retain the flexibility that break clauses appear to offer, but perhaps they should consider the option route instead.
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