Exercising the Break Clause in Commercial Leases and Tenant’s entitlement to Refund

In commercial Leases – especially if the term is longer than 5 years — there may be a break clause which enables the Tenant to break the Lease before the end of the term. This provides comfort for the tenant to end the lease in circumstances where the business is not doing well or the tenant is unable to pay rent.

In a recent case, the Supreme Court had to consider whether a tenant that exercised a break clause should be refunded rent and other payments for the period after the break date.  Having exercised the break clause and ended the lease early, the Tenant sought a refund of parts of the rent and service charge payments which it made earlier in advance, relating to the period after the break clause. The Supreme Court came to the decision that the Tenant was not entitled to a part refund of payment paid in advance as required by the terms of the lease. The Court held that the apportionment of rent and monies due under the Lease only applies to those payable in arrears and not to those payable in advance.

The implication of this case is clear. The tenants must ensure that a break clause expressly provide for a repayment of rent from the break date to the next quarter day. This is particularly important if the exercise of the break clause is conditional on the tenant paying a full quarter’s rent as it is in most of the cases.

By Alireza Nurbakhsh.