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Friday, December 3, 2021

Breaking up is hard to do

As the UK establishes a new normal in the post-pandemic era, the commercial real estate landscape is also undergoing its own transformation.

During the lockdowns, flexible working patterns emerged in compliance with Government guidance, and now many organisations are keen to continue this approach long-term. With this in mind, some business owners are looking to reassess their current leases, with an eagerness to include break clauses into agreements.

Of course, negotiating a new and improved lease can be a complex process, and even then, it is not always straightforward to trigger break clauses as and when they are needed. Therefore, it is best practice for business owners to seek professional advice from the outset, so they can prepare themselves for whatever lies ahead.

Uncertainty in the market

Currently, the downturn in real estate letting appears to be widespread, as according to global property experts CBRE, office investment in the first quarter of 2021 was down 65 percent on the previous quarter and 37 percent on the first quarter of 2020.

Whilst a wider trend in the acceptance of alternate working patterns was already beginning to emerge in the years leading up to the pandemic, COVID-19 and the resulting lockdowns almost certainly contributed to the decline in demand for commercial property space.

Negotiating an effective break clause

Understandably, the pandemic has seen more tenants tempted to utilise existing break clauses, whilst others are keen to insert them into new leases that are being negotiated.

As the vast majority of commercial leases run for five to ten years, inserting a break clause into these may offer more flexibility for tenants and landlords as it enables either party to end the lease early so long as certain conditions have been met.

As it stands, there is a lot of uncertainty when it comes to a demand for office space. For this reason, the inclusion of a break clause can be one of the main sticking points during negotiations between tenants and landlords.

The impact of a break clause

As a leaseholder, a break clause will enable you to walk away from an agreement if the commercial space is no longer needed. Equally, landlords can use them to remove tenants should there be the potential to raise rents or make more money from a new tenant.

Whilst a break clause can have tangible benefits for the party seeking to utilise it, the process itself is far from simple. As such, it is imperative that both parties consider the clause and mechanics for implementation carefully, because any disagreement can lead to expensive and time-consuming legal action.

From a tenant’s perspective, they must realise that triggering a clause will leave the landlord with the task of having to re-let the premises at relatively short notice, so the landlord will usually look to resist exercise of any break clause.

Seeking legal advice

It is important to remember, that once a break clause has been triggered by a tenant, it cannot be legally revoked, even if circumstances change during the notice period. It doesn’t matter if both parties agree to nullify the clause, once it has been triggered, there is no turning back.

Therefore, any tenant needs to think through their decision carefully before they act, and during the drafting process, it is crucial that legal advice is taken early on, so that both parties fully understand the gravity of the clause and the provisions it contains.

Karen Mason, Co-founder Newmanor Law

Karen is is an experienced commercial property lawyer and co-founder of this specialist real estate law firm which deals with acquisitions and sales, construction matters, development, property disputes, landlord and tenant issues along with debt finance and property related tax affairs.

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