When Banks, and other specialised commercial property lenders, are looking to lend to commercial property investors, they always have an interest in the ‘Break Clauses’ in the lease granted to tenants. However, with a long-standing tenant of good covenant, in ‘normal times’ the question of the break option being ‘triggered’ is often more of a technical matter which just forms part of the lender’s sometimes complex calculations of ‘WAULT’ (Weighted Average Unexpired Lease Term).
However, we now have ‘coming up on the horizon’ the fourth quarter rent date where many commercial landlords will not have been paid, sometimes by even what the banks considered were the best covenant tenants.
I have some examples ‘on the desk’ where Loan Covenants are going to be breached at the end of March and banks will be looking at how to deal with this. When a Covenant is breached, the lender cannot just ignore this; they have to either issue a letter of ‘Forgiveness’ or they have to issue a standard letter of Covenant Breach – which enables them to take recovery action further down the process.
There will however be situations where the landlord (or even the lender) may be interested in triggering the Break-Clause. A good example is one client that I have, who is not being paid by a national bar operator for a property which has super development potential. With little prospect of the full rents being paid for a while, and with a break option coming up, they would be better off seeking vacant possession. Another client is a tenant who would really like to escape the obligations of an expensive lease with years to run (and his banker would like him to also).
However, ‘Breaking up is never easy, I know’ and both Landlords and Tenants should be closely examining and understanding the requirements of break options. The Conditions can be onerous, including:
- How and when ‘Notice’ is served.
- How a payment needs to be calculated
- Arrears needing to be made up to date (which could include interest due on arrears)
- The definition of ‘Vacant Possession’
- Repairs and ‘making good.’
The devil is in the detail on these matters. I’d recommend that for any commercial property investors, and of course, tenants, who are considering their ‘Break Option’ they should start looking at this very early on and seek legal advice if necessary.