Surviving the High Street: The break clause lifeline

No-one is safe on the High Street. Once 'blue chip' names such as Marks and Spencer, New Look and Mothercare are suffering and forcing store closures. House of Fraser has been rescued in a pre-pack but some of its stores are still likely to go.

There is no secret to success in the High Street and when taking on a new High Street lease a landlord will commonly offer you a fixed term lease of 3, 5, 7 10 or 15 years. The longer the lease the better the perceived value of the landlord's interest. Initially a short term lease of 3 or 5 years may seem attractive but may come with a drawback. The landlord will want to exclude your right to renew this comparatively short  lease when it comes to an end.

All well and good if the business has not been successful but if you have survived and prospered you are at the mercy of the landlord who may dictate unfavourable terms for a renewal.

A longer term lease may avoid these problems but with a major drawback: agreeing to pay rent on a longer term lease is a substantial commitment which, if the business does not succeed, may leave you well out of pocket if no-one else wants to take on your lease.

The answer could be a tenant's break clause. This is a legal device which will need to be built into the lease from day one whereby a lease can be terminated early, usually on a set date, by notice to the landlord.  The lease can then be for, maybe, 7 or 10 years with a break clause operable at the tenant's discretion at year 3 or 5 on giving at least 6 months prior notice.

The exact terms are open to negotiation but to the landlord, if it makes the difference between letting the property and leaving it standing empty, it may not be a bad option.

Obviously, although appearing content to agree this on day one, the landlord may prefer you not to operate the break clause and will look carefully at how you do it as there is scope for getting it wrong.

Therefore you should take expert legal advice both before taking on the lease and before operating the break clause. The only pre-conditions in the clause should be that:

  • you are up to date with the rent; and
  • the property is empty when you leave.

This is often not the case and a landlord may try to put forward other terms you need to comply with before the break clause can be relied on, such as compliance with other terms of the lease that may be open to interpretation. Getting the wording of the clause right is crucial.

Additionally, when it comes to serving the notice on the landlord, the lease may insist that a particular method of service is used within a particular time frame and this may not be easy to achieve: what if the landlord is a foreign company with no address suitable for service within UK?

So, expert legal advice is needed again:

  • before you sign the lease to make sure the method of service is achievable; and
  • before you serve the notice to make sure you follow exactly the service provisions set out in the lease.

With these methods in place, tenants can ensure that a break clause is practically exercisable.

Thus, a well drafted and effective break clause ensures that a business retains the control of being able to end a lease on their own terms, whilst preventing them being held to ransom by the landlord upon renewal.

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