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The pros and cons of break clauses in commercial property leasing

Negotiating a break clause in a commercial property lease is something landlords and tenants may wish to consider, given the uncertain economic outlook.

Investment sources are predicting that the value of commercial property across the UK could fall by as much as 15 per cent by the end of next year, as rising interest rates make financial deals more expensive and the risk of a recession threatens to slow rent growth.

The full impact of rising borrowing costs has yet to be reflected, but transaction data shows investors are becoming more cautious about how much they are willing to pay for some types of property, according to Nick Montgomery, Head of UK Property Investment at Schroders.

Provides flexibility

So, when negotiating a commercial lease, you need to decide on whether to negotiate a break clause. It allows both parties flexibility and provides a mechanism to terminate the agreement early.

For landlords it may not be beneficial, depending on how the property market is performing locally. For instance, are there numerous other competing properties available nearby?

On the other hand, it could allow the landlord to take the property back earlier than the full term.

For tenants, it could be beneficial given rising costs and interest rates which could affect their business.

Factors for tenants to consider include:

  • Will your business expand to the point you outgrow the premises?
  • Will you be guaranteed to be able to continue paying the rent if the business struggles?
  • What happens if you later discover the property or lease itself is not suitable?

For landlords:

  • Will want to sell your freehold reversion with vacant possession?
  • Will you be able to take back possession of the premises, for your use, or for another tenant?

A landlord may include conditions on the right to exercise a break clause and could include:

  • All rent must be paid
  • There is no breach of any repairs agreements
  • It must be vacant possession, i.e. empty

Once signed the agreement becomes a binding contract, it is vital both parties take professional advice before entering into a contract.

For help and advice on commercial property matters, contact our team today.

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