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Looking to downsize or upgrade your pharmacy premises needs careful consideration when you’re a tenant, writes Adam Bernstein

Unless a business is flush with cash, taking on a premises lease and becoming a tenant is the only way to get up and running. In time, however, a tenant may find that their premises needs change.

It may be doing so well that it has to move and take on a larger shop. On the other hand, the situation may not be so rosy; the only option to stay afloat is to downsize.

But how can a tenant move on? How can you get out of a lease?

Exercising a break clause

In law, a tenant does not have an automatic right to end a lease. Further, ‘break clauses’ that lead to the legal termination of a lease are not regulated by statute. This means, very simply, that beyond case law, they are solely governed by what is written within the lease. 

The starting point for any debate on the subject is the recognition that break clauses are complicated and tenants are strongly advised to seek legal advice if they are considering exercising one.

Bluntly, a tenant must strictly comply with all relevant requirements in the break clause, and they would be well advised to protect their position by keeping evidence of their compliance.

This means keeping proof of how they posted or delivered the notice; if the lease is silent on the matter, the tenant should ask the landlord to acknowledge receipt.

Next, it’s key that the tenant pays any outstanding monies due to the landlord, even if it is disputed; payments can be made on a ‘without prejudice’ basis and argued over later.

It’s also important to ask the landlord for the precise steps needed to comply with any break conditions. This should include the landlord supplying a schedule of dilapidations – a list of repairs that need to be completed to reinstate the premises to a defined standard to formally end the lease.

Another option is to ask the landlord to accept the break notice upon payment of an agreed amount to deal with any outstanding breaches of covenant.

Timescales

As to when to exercise a break clause, that will always be whenever the lease permits it. Often, landlords require tenants to provide three or six months written notice of the intention to exercise a break. But then this must be validly served on the landlord. 

It is important to note that break clauses are often conditional. This means that without satisfying these condition the break clause exercise won’t be valid. 

The most common conditions are that the tenant must have paid all the rent (or all payments due under the lease) up to and including the break date; the tenant must have observed all its covenants; they must not be in material breach of repairing covenants; and the tenant must hand the property back empty and with ‘vacant possession’.

Observing the specified time limits is central to successfully exercising a break clause.

Break clauses can be fixed or rolling. A fixed break clause is usually exercised on a defined date during the lease term. Rolling break clauses are a type of break clause that are exercisable at any time during the term, upon sufficient notice.

 When serving notice on the landlord, understanding what the lease demands is key. If a lease demands notice on pink paper, then pink paper must be used. While the tenant must be clear on their responsibilities, a landlord must act reasonably in accepting this. 

Dilapidations

Dilapidations – the obligation to reinstate premises – can be very onerous on tenants.

The end of the lease usually acts as a trigger that raises dilapidations issues precisely because tenants have obligations under the lease to reinstate premises. And even if there are no conditions on the right to break, a landlord can still pursue a claim. 

Tenants can protect themselves against aggressive landlords pursuing them for dilapidations by seeking legal advice during lease negotiations prior to taking on a lease to ensure that repairing obligations are limited and not too onerous. Tenants should aim to incorporate a ‘schedule of condition’ which details the state of the premises at the outset and what is necessary for reinstatement on return at the end of the lease.

But if the lease is currently in force, then the best a tenant can do is regularly maintain the premises to minimise the expenditure at the end of the lease.

Tenants should assess the premises before the end of the term and obtain comparative quotes from different contractors to carry out any repairs; they need to make sure that the work is done so as to not block the ability to hand back the premises in time correctly.

Tenants should also seek legal advice upon receipt of a dilapidations claim; and consider instructing a surveyor to assess the landlord’s dilapidations claim in line with the lease to make sure that it is fair.

Remember

It’s important to keep in mind the fact that once a break notice has been exercised it cannot be withdrawn unilaterally; tenants should be certain that they want to get out of the lease.

This said, the parties to the lease may agree to the break notice being withdrawn. However, as a matter of law, this will create a new lease with effect from the expiry of the break notice; this can have wide ranging effects.

The importance of obtaining expert advice over the exercise of a break clause or the conditions attached to it cannot be stressed enough; tenants are advised to talk to a solicitor before they exercise a break clause.