A break option can generally be described as a right conferred upon a tenant to terminate its tenancy prior to the expiry of the term of a lease. In the current economic environment, with the spike in commercial properties available for rent at increasingly competitive rents, break options are of particular importance to both landlords and tenants and can be the subject of intense negotiation both at the time of the grant of the lease and at the time of its exercise.
For a tenant, a break option gives it the opportunity to exit a potentially onerous or unsatisfactory lease arrangement and allows it to take advantage of the lower rents available in the open market. Even for a tenant happy in its present accommodation, the existence of a break option may improve its bargaining position and potentially assist in any attempts it may make to secure an improvement on its existing lease terms.
Conversely, landlords will more than likely regard the existence of a break option as an unwelcome addition to the difficulties they are already encountering in these increasingly uncertain times. The exercise of a break option for a landlord means being left with a vacant property which is not generating any income with prospective tenants in short supply. Moreover, the existence of a break option in the first place as part of any lease agreement can sometimes have a significant negative impact on the investment value of a property, as it reduces the certainty regarding the future income stream.
A break option therefore represents a significant, and potentially contentious, facet of any landlord and tenant relationship.
The fact that a break option confers a right upon a tenant to terminate a lease prior to the formal expiry of the term, and therefore represents a departure from the standard lease agreement, means that it has long been considered a privilege (rather than a right) by the courts. A tenant must therefore take great care to ensure that it has strictly complied with the conditions of the break option, as failure to do so will more often than not render the exercise of the break option void. By the same measure, a vigilant landlord may also be successful in defeating the purported exercise of a tenant's break option by monitoring the tenant's compliance to ensure that the break conditions are observed.
The most common circumstances in which a tenant's purported exercise of a break option have been defeated generally involve issues with the...