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“Dealing With Break Clauses In A Commercial Space For Rent” written by Mike Marko.

Are you unsure on how to deal with break clauses in a commercial space for rent?

As much as possible, property managers of a commercial space for rent would prefer to end the tenancy of their tenant on the agreed date…. and on good terms. Ending the tenancy earlier than the stated date on the agreement disrupts the business of both parties.

That disruption is why you should be prepared ahead of time on how you should deal with someone who breaks the lease.

A lease break can happen anytime.,,

Even when you least expect it from your tenant.

This is why today I want to talk to you about breaking leases, and the applicable clauses in a commercial space for rent.

Understanding “Break Clauses” In A Commercial Space For Rent

When running a commercial property management business you have to be able to accommodate and work with your business tenants. One of the most requested items that a business will request added to their lease agreement is a “Break Clause”.

Companies will request a Break Clause to give them the most flexibility in their lease if business falters or their business fails. Landlords like having the Break Clause because it sets up a specific way to end a commercial lease early if both parties meet the conditions agreed upon in the commercial lease agreement.

As the property manager, you should understand the break clauses agreed to in the commercial lease to avoid problems regarding ending the tenancy early. To give you a clear understanding about break clauses it is essential that we start with its definition…

What Is A Break Clause

The break clause is a clause in the terms of lease agreement that allows both parties to end the tenancy before its actual end date. When negotiating and signing the lease agreement both parties, if agreed to, can add wording that will trigger an early separation or ending of the lease if certain factors occur. A common request for a lease break clause from the tenant is if the tenant loses their job, their business fails, or they have to relocate due to economic reasons.

There are also instances where the tenant was put in a situation where he/she has to move to another place because of valid reasons like being assigned to another job, etc.

Normally the Landlord or property management company will add a lease break clause to shorten the time need to evict a tenant if they fail to pay rents for an agreed amount of time or violate any of the other terms of the lease agreement. If the tenant or the property manager wants to end the tenancy early using the break clause then they must follow the correct procedures to avoid any violation of rental laws.This is where a break clause plays a vital role when dealing with early terminations of lease agreements.

Form And Service Of The Notice

When negotiating and signing the lease agreement is the proper time to introduce and agree to a break clause if needed. As the property manager of the property you must indicate how a lease break could happen in your rental agreement with the tenant. Normally you will detail in the terms that a notice must be given before you remove a tenant from your commercial space for rent.

Keep in mind that failing to follow the required procedures following the break clause in the lease agreement will invalidate the notice.

Once you gave the notice to your tenant it cannot be withdrawn unless both parties come to an agreement to withdraw the notice or fix what caused the notice to be given.  So here are some tips for landlords and tenants in dealing with break clauses in a commercial space for rent.

Tips For Landlords

When renting commercial space to businesses it is important to keep a constant line of communications open between you and the principal signer of the lease agreement. This way you are made aware of any factors or reasons that could trigger a break lease clause.

The best way to keep a relationship with your tenants is to your tenant thoroughly and be willing to work with them if needed. However if you see the need to invoke the break lease clause then you should explain to them the situation, see if they can remedy or fix the situation prior to you giving them the notice.

Sometimes it is possible to use violation of the break lease clause to re-negotiate the terms of the lease agreement. This is commonly done to avoid any legal eviction process or break in lease clause before your tenant finally moves out of your commercial space for rent…

Tips For Tenants

Tenants need to be educated and understand how and why a break lease clause can be used or invoked. The best way to do this is to read your lease or rental agreement with your landlord and ask questions or get clarification on what each term means and how it could affect your business.

For the break lease clauses tenants need to be aware and check if the eviction is mandatory or permissive according to what is agreed to in the lease agreement. With mandatory terms this leaves little to negotiate or discuss when a lease break clause is initiated. Whereas a permissive terms allow negotiation and discussions to avoid the lease break clause…

The biggest tip that we can suggest for tenants is to keep a constant line of communication open with your landlord or property manager. This way you can avoid any situations that could arise that could trigger a mandatory or permissive break in lease clause. In keeping communication with the parties to the lease agreement you might be able to negotiate or re-negotiate terms that could ease any break clause from happening…

Prior to signing the lease agreement determine if the break clause is mandatory or permissive. If you are in doubt ask questions and get clarification prior to agreeing to the lease. It is also important to understand and know the form of notice required prior to any break lease clause being triggered in your lease agreement…

Timing

The break lease clause is added to commercial leases to allow the early termination of the the lease. Both parties have the choice to end the tenancy, as agreed to in the break clause, anytime as long as the reason is permitted on their agreement. That’s the reason why it is important to be specific and talk this issue thoroughly with your tenant while you’re still making a draft of your agreement.

Rent Review

Most commercial leases are negotiated to include a rent review clause. This clause allows rents to be increased  or re-negotiated on the commercial property according to a set formula or agreed upon term. If you are considering invoking a break lease clause close to the rent review date try considering not to exercise the rent review. When negotiating or increasing rents this could cause hardship on the business and the rent increase would cause the tenant to use their break option.

For a lease break to be valid and unquestioned by the courts it is best not to link it to a rent increase or rent review process as the tenant could argue that you increased the rent causing them to default on their lease break clause…

If doing the rent review check the time limits in the rent review clause because you need to follow it to make sure that it is not linked to the break clause…

Break Lease Notice

When negotiating the break term you as the property manager explain fully the clause to the business tenant so there is no misunderstandings if the break lease clause is invoked. When explaining the clause you should make the tenant aware of the notices required and the procedures to be followed if a break lease clause is invoked.

Both the tenant and the property manager need to study the break date and understand the notice period required. As the tenant if you believe your company is heading for a break lease clause then you should you review and understand your options at the signing of the lease and months before the notice period commences.

When receiving or giving a break notice if you as the tenant are in doubt regarding the date break you need to communicate with your landlord or property manager personally and let them check the clause thoroughly.

As a property manager giving a break notice you should calculate the required service period for the notice carefully and serve multiple notices if in doubt. If you need to serve notice of a break in lease then it is best to plan for this and not leave service until the last minute while allowing sufficient time for service…

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Break Conditions (Pre-conditions)

The break conditions are usually found in the agreement’s break clause. Prior to any break situation you should review the agreement’s clause regarding the break and know if you are going to invoke a break clause that the procedure to do this must be strictly followed by the property manager and the tenant.

Here is the most common terms included that can trigger the break clause in the negotiated lease agreement…

The Tenant Has Not Paid All Of the Rents Due

When signing and negotiating the lease agreement often the property manager will attach a break clause to shorten the eviction time needed.  This is executed if the commercial tenant fails to pay rents on time or pay rents consistently.

According the the lease agreement often the tenant is required to pay the rent on time and by negotiated terms. Often a commercial rent can be negotiated to be paid in full yearly, monthly, or quarterly (every 3 months).

No matter how much or when the rent is due for the commercial lease the break lease clause is normally attached to automatically commence if the rents are not paid in full according to the rent schedule agreed to in the lease agreement. So ideally as a property manager you should always be prepared to invoke the break lease clause when collecting any rents.

It is recommended that you negotiate a payment schedule to cover any move out costs, or unpaid rents, if the break lease clause is invoked and upheld according to lease agreement terms.

By setting a payment schedule to coincide with the break clause the tenant will not only pay the unpaid rent before they move out, as well as any other costs associated with the lease agreement they signed. As the property manager you must be strict in this condition to ensure that the tenant will not leave any unpaid payments.

Making The Break Final

Prior to renting any commercial properties you should be aware of all forms and contracts that will help you to manage your properties efficiently. As part of the break clause in a lease there are notices that should be pre-drafted and approved as well as a “completion statement” to avoid giving notice regarding a tenant’s unpaid balance.

To make the break in lease final you need to follow all the rules and guidelines set out in the lease agreement. Often this includes notices, forms, and documentation showing you tried and failed to avoid invoking the break in lease clause…

Tenant Does Not Comply With Terms Of The Lease

The lease agreement terms are the list or make up of responsibilities of all parties to the lease and are enforceable by law. That is why it is important to negotiate, understand, and explain to all parties of the lease what terms and responsibilities are required for the lease to stay in place until the end of the term.

When the tenant does not comply or follow through on their responsibilities to the lease then a break clause is often negotiated into the lease as a remedy to this non compliance.

As the property manager you should know and understand all your responsibilities and follow them diligently and thoroughly to avoid or prevent your tenant from exercising a break clause. All parties to the lease agreement are subject to the break clause so be aware that to invoke a break you or the tenant must have a breach and have materially or substantially not complied with their obligations under the lease.

The Tenant Must Give Vacant Possession

As part of the break clause it is best to detail what the tenant is required to surrender when leaving the property. Normally all of fixtures, fittings, personal belongings, and rubbish need to be removed or a negotiated procedure and cleaning costs needs to be covered by the exiting tenant. This is to make sure to secure the departure in time so you can easily and efficiently rent the property to new commercial tenants.

As part of the break procedure you should make sure that you are allowed to enter the property before they actually move out. In some cases, property managers also require their tenant to remove all of any alterations made and require the property returned as it was initially rented to the commercial tenant. Requiring a reinstatement of the premises ensures that the property or rented unit is returned to the landlord in the condition required by the lease.

Requiring your tenant to remove all of their belongings in the rented property ensures you that the property is returned to its original condition. To make sure that this is followed you need to negotiate this into the lease agreement and associate this condition with the break in lease clause. When this requirement is included in your lease agreement it is best to negotiate penalties associated with any items that are not removed or left.

When the keys are returned as part of the break procedure make sure that no tenant, employees, contractors, security staff, subtenants or unlawful persons are in occupation of the property on the break date. We would highly recommend as a common procedure to change all locks on commercial space to ensure past tenants can not have access to the building or space after they have vacated the property.

During the tenancy, tell your tenant to avoid doing anything to the commercial space for rent that suggests that he is continuing to use the property for himself. Tenants should also avoid any substantial interference with the landlord’s renting or redistribution of the property.

Settlement

A common part of a break in lease claus is a negotiated settlement when a break in lease is invoked or occurs. If the tenant sees their business as not being able to meet the terms of the lease then they can invoke the break in lease and pay the agreed to settlement in advance of the break date which covers dilapidations and releases the tenant from the break pre conditions. When you are made aware of a break in lease possibility then it is best for the property manager to negotiate an uplift on any dilapidations settlement for giving the release from the pre-conditions.

When signing the lease it is the property manager’s responsibility to let the tenant know if they follow break in lease clauses then this will not negatively be marked against their credit or future renting of properties.

For instance when a tenant is upfront and informs the property manager that they are facing financial or other factors that could cause a break in lease they could agree to an early settlement to ensure that the lease is going to end on the break date. This will allow them to make a clean departure and avoid making  time and resources  to comply with what may be very difficult pre-conditions.

Negotiate Break Clauses Prior To Lease Signing

During the negotiation of a commercial lease you should be aware that a break in lease is possible and negotiate terms, conditions, procedures, and policies into the lease prior to finalizing the lease with your commercial tenant.

It’s best to finalize lease agreements and negotiations prior to your tenant moving in. This allows you to negotiate and make sure that all settlement negotiations are without prejudice and subject to contract. If you want to preserve the pre-conditions then this should be made clear in the settlement that the other pre-conditions are not waived.

Negotiate The Settlement

Prior to signing the lease the tenant or property manager can negotiate any condition into or out of the break clause. When renting office space that restricts any alterations and you can confirm this then you may allow to negotiate out any pre-condition statements to the break clause. During negotiations of the lease agreement discuss whether it is amenable to a settlement which releases you from the pre-conditions.

Pay close attention to the pre-conditions as they could be costly and not easily met. Study how long it will take to undertake necessary work to comply with the pre-conditions and set a deadline for any settlement to be agreed and documented.

When signing the lease contract all parties to the contract have agreed in principle to all conditions including a break clause with end date of lease included from this clause, if included…

Final Thoughts About Break Clause In Commercial Space For Rent

In this blog post we talked about breaking leases, and the applicable clauses in a commercial space for rent. While the goal is to have a tenancy last until it expires (and to have the tenancy extended), sometimes things don’t work out that way.  Sometimes you have to terminate the lease and evict the tenants.

Therefore we talked about how to setup the break lease clause to protect you when things go awry.  We discussed how to handle the conditions that result in a break lease, the notice, and how to inevitably take possession of the property back.

If you got questions, feel free to comment them below.

 

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Suggested Articles:
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3. Tips On Increasing Profitability When Managing A Commercial Property For Lease

Author: Mike Marko
Click here to contact Mike
www.IMConsultantServices.com

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ARTICLE: Dealing With Break Clauses In A Commercial Space For Rent