Failure to exercise break clauses correctly costs Shropshire businesses
Shropshire companies are still failing to extract themselves from property leases they no longer want, and, as a result, losing thousands of pounds, according to Shropshire law firm FBC Manby Bowdler LLP.
David Lucas, commercial property partner in FBC Manby Bowdler’s Shrewsbury office, says that current economic circumstances mean that many tenants of commercial properties are looking to exercise break clauses in their lease agreements in order to reduce their rent and other property costs.
“There are break clauses written into many commercial leases, but in our experience too many organisations which try to exercise them get it wrong. Such a mistake can cost them many thousands of pounds as they have to continue paying rent on their current premises until the end of the lease, or the next opportunity to break, often while paying for a lease on another building which they want to move into,” explains Mr Lucas who is based in FBC Manby Bowdler’s office on Shrewsbury Business Park.
According to Mr Lucas, getting the timing of break notices wrong and failing to follow the exact conditions laid down in lease terms are the most common reasons for tenants failing to terminate their lease by using a break clause.
“Unfortunately there is no standard formula for working out when the dates by which to exercise break clauses fall. It all depends how the lease is drafted. It could be the term commencement date, the date the lease was signed or a number of other dates. This naturally leads to confusion and mistakes if a solicitor is not consulted beforehand,” explains Mr Lucas.
“We always advise tenants not to accept any conditions on a break clause when negotiating a new lease, as mistakes can easily be made in meeting apparently the simplest conditions. For example, tenants can fall foul of not carrying out their repairing conditions, not providing vacant possession or of not complying with a covenant.”
According to Mr Lucas, break clauses with more onerous conditions also catch out tenants.
He says: “Sometimes break clauses insist that the rent, or a lump sum as payment for exercising the break, must be paid at the same time as the break clause is exercised. So, if tenants fail to enclose a cheque with the break notice, it is invalid.
“If the break clause is conditional on payment of all due rent, this means that the tenant has to pay a full quarter’s rent to the landlord, even if there are only a few days until the end of the lease.
“Increasingly the break notice needs to be served at the same time as the landlord receives cleared funds. Tenants need to be aware of this and put their solicitor in funds in sufficient time to ensure that this can happen.”
According to Mr Lucas, many businesses do not give sufficient thought to terminating old leases when moving to new premises.
“It’s as if they are so blinded by the prospect of reducing property costs, or moving to a building which better suits their needs, that they focus the majority of management’s time and efforts on this and forget about what they need to do to leave their current premises,” says Mr Lucas.
“It really is as vital to instruct a solicitor to act on the termination of an existing lease, as it is on a new one, and for a business to take advice on the implications of exercising a break clause, at least 12 months in advance in order to get it right.”
Further information about break clauses and how to exercise them correctly is available from David Lucas and his team. They can be contacted on tel. 01743 241551 or email d.lucas@fbcmb.co.uk.
