Leases in the retail sector: Break clauses

Break clauses are essential tools in retail leases, offering flexibility to either the landlord, the tenant, or both parties, allowing them to terminate the lease before the end of the agreed term. For retail tenants, having the option to exercise a break clause is often a vital negotiation point, providing an exit strategy should market conditions change or their business needs shift.

Tenant’s break clause

Typically, a landlord break clause will allow the landlord to terminate the lease without conditions, offering them flexibility if they decide to repurpose or redevelop the property. However, a tenant break clause is often subject to conditions. These conditions may require the tenant to meet certain obligations to exercise the break clause, making it a more complex issue for retail tenants.

Retailers often seek to include a break clause in their leases to provide flexibility, particularly in volatile markets or if the business’s operational needs evolve. For example, if a retail business is struggling or needs to downsize, a break clause gives them the option to vacate the property without being tied to a long-term lease.

Lease Code 2020 and tenant break clauses

The Lease Code 2020 outlines that tenant break clauses should only be conditional on the following:

The tenant paying the rent due up to the break date.
The tenant giving up occupation, leaving the property vacant, and ensuring no subtenants or other occupiers remain.

Retail tenants should also be aware that a break clause could be structured to include additional provisions, such as:

A penalty payment if the tenant chooses to exercise the break clause.
A rent-free period commencing on the break date if the tenant does not exercise the break clause, offering an incentive for tenants to remain if they choose not to break the lease.

Historically, break clauses often required tenants to provide vacant possession and to have complied with all lease covenants. Tenants should be cautious about agreeing to such conditions. These conditions must be strictly performed, and a tenant should resist any unnecessary restrictions that could jeopardize their ability to exercise the break clause. A landlord may have a claim for damages if the tenant breaches covenants, but such breaches should not invalidate the exercise of the break clause.

Landlord’s break clause and 54 Act protection

For landlords wishing to include a break clause, it is best practice to exclude the lease from the security of tenure provisions of the Landlord and Tenant Act 1954 ("54 Act"). If a lease is not excluded, the landlord cannot simply exercise the break clause to regain possession. Instead, the landlord would need to serve a Section 25 notice under the 54 Act, relying on one of the statutory grounds to oppose lease renewal, in addition to the break notice.

Retail tenants should carefully consider whether to accept a landlord break clause and ensure it aligns with their business needs. For example, a landlord’s break clause could increase uncertainty for tenants, potentially putting them at risk of being forced out of a prime retail location unexpectedly.

Rent refunds following a break clause

A critical consideration for tenants exercising a break clause is ensuring they are refunded for any rent paid in advance that relates to the period after the break date. The Apportionment Act 1870 only applies to rent payable in arrears and not in advance (which most leases require). The Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd case clarified that there is no implied term in a lease requiring the repayment of rent paid in advance after a break date.

As a result, tenants should ensure that the lease includes an express provision requiring the landlord to refund any sums paid in advance for periods following the break date. Alternatively, tenants may seek to structure the break date to coincide with the last day of any payment period, such as the last day of the month or quarter, which would avoid any confusion or disputes about rent payments.

Service of the break notice

Finally, when exercising a break clause, tenants and landlords must pay close attention to the specific requirements for serving the break notice. Failure to comply with the lease provisions regarding the timing or method of service can render the break notice ineffective, meaning the tenant may remain bound to the lease for the full term. Retail tenants should ensure that their legal advisors review the break clause carefully to ensure compliance with all notice provisions.