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Rent review clauses and break clauses in commercial leases - What do these mean?



Commercial buildings with "for lease" signs outside

Rent Review Clause


Most commercial leases will contain a rent review clause. This is a provision whereby on certain dates the rent will be reviewed, and the new rent fixed.


Such rent reviews are generally every three years or every five years depending on the length of the lease, but this is open to negotiation at the time the lease is being negotiated.


There are many different ways that the rent can be reviewed from the most straightforward where particular sums of rent are set out in the lease including the dates from which they will apply to rent increases in accordance with inflation, by a fixed percentage or to the open market rent at the rent review date. Again, all of these can be negotiated whilst the lease has been negotiated but the most popular is open market rent.


Most leases have a provision that the landlord and the tenant should try and agree the rent before the rent review date but if it cannot be agreed then either may trigger a formal request for the rent to be reviewed and set-generally by an independent chartered surveyor.


Most leases will provide that if the new rent has not been agreed by the rent review date, then that will be backdated from whichever date it is agreed or set to the original rent review date.

 

Break Clauses


Many leases will also contain within them a break clause. This is a clause that allows (generally the tenant but it can be either or both tenant and landlord) to bring the lease to an end before the lease expiry date.


This type of clause can be extremely valuable to a tenant as they can enter into a reasonably long-term lease knowing that they have security if their business etc. prospers but also with an early get out clause should circumstances change.


Break clauses normally set out how much notice the party wants to exercise it has to give and contain provisions such as they must have vacated on the break date and all payments and other obligations under the lease are up-to-date and have been complied with. It is extremely important that the terms of the break clause are understood and that early legal advice is sought should either party wish to exercise the break clause as the courts of view a commercial lease is a commercial contract and the terms will be strictly enforced and so if you miss a notice period by just one day you may have lost the opportunity to bring the lease to an early end.

 

Break Clauses and Rent Reviews - Do They Work Together?


It is fairly common to see leases which have rent review dates and break clause dates for the same time - for example a rent review every five years and a break clause every five years and it is often assumed that these work together and so, assuming the break clauses in the tenants favour, that the tenant can wait and see what the new rent is going to be and then serve the break clause if it is too high and bring the lease to an end,. This is very rarely how it would actually work in practice.


These clauses can be extremely complicated legally, but it is a relatively unusual in practice that the tenant will know what the new rent is going to be insufficient time to serve the break notice. For example, many leases will require the tenants agree give six months’ notice of their intention to exercise the break clause and that notice must be given so that it does not expire on or after the break date and if that is missed by one date the notice becomes invalid. That means that the notice realistically needs to have been served seven months before the break date to ensure that all times have been complied with.


The issue is further complicated by the fact that the time limits on the break clause will be strictly enforced by a court but generally speaking leases provide that a rent review dates on not a case where “time is of the essence” which means that if a review date is missed then the review can simply take place any day after that date and the rent then backdated.


It is essential that legal advice is sought well in advance of the break date so that all of the options can be explored and if need be, advice obtained from appropriately experienced chartered surveyors to give an indication as to what any rent is likely to increase to. If the lease provided for six months’ notice is to be given before the break date, then I would recommend that solicitors are consulted at the very latest 10 months before the break date to ensure that there is plenty of time for things to be done without being rushed.


If you would like a free no obligation discussion with us then please call us on 0191 567 7244 and we’ll be happy to help you. We provide Honest, No-nonsense Advice.


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