Do you need a break?

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When you’re running an up and coming business, costs are always on your mind. The less costs you have, the more profit you can make. So what do you do? You look for savings, HOWEVER, one of the biggest overheads of any business, often gets overlooked; RENT. In the UK most businesses rent their premises from a landlord as tenants under a lease. When the market was booming (pre-credit crunch) landlords had the upper hand setting high rents and long leases however in today’s challenging economic climate, landlords and tenants have found that long leases and high rents are no longer sustainable; there needs to be a compromise. This is why most commercial leases contain a BREAK clause which enables either the landlord or the tenant or BOTH to end the lease early and seek better terms elsewhere.

How does it work?

Say for example, you own a restaurant. You have a three year lease. In year one, business is booming however in year two, it’s not doing so well because the government has got rid of a big housing estate next door causing footfall to significantly decrease. You still have to pay your rent which in year one, was a piece of cake but now in year two, is a massive burden. You review your lease agreement but ALAS you’re locked in until the end of year 3. You go to the bank to apply for a loan. Whilst doing this you spot a great  empty space in a shopping centre round the corner. You know that your business would thrive there. You review your lease again, alas,  NOTHING HAS CHANGED, you’re STILL locked in until the end of year 3.

In the above scenario, not having a break clause in your lease prohibits you from getting out of a high rent deal in a poor area for your business. Your overheads increase and your profits decrease. Let’s look at this scenario WITH a break clause.

You have a three year lease. As soon as business starts to fail in year two you begin to review your options. You look closely at your lease agreement and to your joy you see that you have a break clause that kicks in after 18 months. You serve a notice to your landlord in accordance with the lease agreement, notifying him that you want to end your lease early. Your landlord accepts and at 18 months you move out of the premises and into the space that you spotted in the shopping centre. HAPPY DAYS.

Can you see the benefits for your business in having a break clause? It gives you some leeway to reassess one of your business’ biggest expenditures. In some circumstances where the location and premises still suit your business needs but the rent is just too high notifying your landlord that you are thinking of sending a notice to activate your break clause could help to bring your landlord to the negotiation table and agree a more sustainable rent. Landlords are business people too and what they value more than anything else is reliable tenants. However, as with everything in law (and that’s why you need a lawyer) there is more to it than just having a break clause and sending a notice. Here are a few considerations to bear in mind:

  1. Form and Service of Notice – You must comply exactly with method and form of service of a notice to exercise a break clause. Also once the notice has been served, it cannot be withdrawn. If the notice complies, you WILL be moving out so consider it seriously.
  2. Timing – It is important when drafting and negotiating the break clause that it is clear when the break date is and what the required notice period is. A break clause may occur on one or more specified dates or be exercisable after a specific period of time has elapsed. Your lawyer can help you work out what works for your business. Landlords usually never want to lose a tenant so they will hold you to strict compliance with the break clause notice provisions; the best thing is to diarise them so that you always have them on your radar and  consider them well in advance.
  3. Break conditions – These conditions must be strictly adhered to. If these pre-conditions are not complied with, your break notice may not be accepted. The most common pre-condition is that all rents due under the lease must have been paid. You must make sure that your lawyer negotiates this condition carefully. A lot of money is wasted in court where it is not clear whether a tenant has to pay a full quarter’s rent or just the apportioned rent up to the date of the break clause. There have been instances where a tenant has had to pay the full rent with no refund. Another pre-condition is that the tenant must give up vacant possession meaning the premises should be EMPTY. Take all your stuff and go.

So do you need a break? Yes! Make sure that you are always giving your business options and do NOT forget to use them.

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One thought on “Do you need a break?

  1. Good post! Very informative – would be good to understand if break clauses are something that can also be used in other contracts say for example in an agent-client contract ? Thanks again for the good write up!

    Like

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