What Are Break Clauses in a Commercial Lease?

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Table of Contents

• What is a Break Clause? 
• Damage and Destruction 
• Resumption Clause
• Relocation Clause
• Key Takeaways

As a commercial tenant, understanding key terms in your lease and how they operate is essential. You want to ensure your commercial lease adequately protects your business interests. Likewise, understanding your lease helps avoid breaching any of its terms. If you or your landlord want the lease to end early, you may have the right to do so under a break clause. Your tenancy agreement would detail certain conditions your landlord must follow, including complying with the break notice period. This article explores break clauses in commercial leases.

What is a Break Clause? 

A break clause in a commercial lease allows one party (or both) to terminate a lease early. Such clauses are important to a landlord and tenant and can come in many forms. Common break clauses in commercial leases are referred to as “damage and destruction,” “relocation”, or “resumption” clauses. The following sections will explore these clauses in detail.

Damage and Destruction 

A damage and destruction clause is a form of break clause that outlines the rights and obligations of both the landlord and tenant in the case of damage to the premises during the lease term due to circumstances outside of either party’s control. For example, you might use this clause after a:

• fire; 
• storm; 
• tempest; 
• earthquake; 
• lightning; or
• explosion or other similar event. 

The effect of a damage and destruction clause within a commercial lease will depend upon the lease itself. However, it will generally prescribe the following in the case of damage and destruction:

1. there will be a rental abatement;
2. the landlord has no obligation to repair the damage but, ideally, should notify the tenants of their intention to terminate the lease or repair the property;
3. generally, if the landlord has determined that it will undertake repairs, the tenant may be restricted from terminating (unless the landlord takes too long); and
4. if the landlord notifies the tenant that it does not intend to repair, this usually triggers a termination right. 

Resumption Clause

A resumption clause refers to a situation where a government authority will resume the premises. As such, this would usually mean the lease for your premises would terminate before the end of the lease term.

There are a few key things to note about resumption:

1. it may allow the government authority to resume the whole or part of the premises;
2. resumption is compulsory and usually outside the landlord’s control. As such, these clauses will usually specifically state that the landlord is not liable and the tenant has no claim of compensation from the landlord; and
3. tenants may have a right to compensation from the government authority itself. As a tenant, you should seek legal advice if you receive a resumption notice.

Relocation Clause

A relocation clause permits a landlord to move a tenant out of their current premises and into an alternative premises for the landlord to conduct refurbishment work. 

As a tenant, consider the lease agreement and potential consequences to your business if you receive a relocation clause in the initial term of your lease. It would not be ideal to have to relocate three months into the lease. Accordingly, you might negotiate that a landlord can only serve you a relocation notice after three years or only in an option term. 

If the landlord is proceeding with renovations and you are relocating to a new place, you should inspect the alternate premises. You might have particular requirements to operate your business successfully. For example, you might need particular gas points, square meterage or fit-out requirements. When negotiating a relocation clause, be sure to include these details so you can move to an alternative location that is appropriate for your business. 

The following table outlines other key issues to consider within a relocation clause.

Do You Have a Retail Lease?

No state-based legislation will regulate relocation clauses in a commercial lease (a non-retail lease). However, such legislation exists for retail leases, specifically regarding the circumstances that trigger relocation. For example, a landlord may need to demonstrate that the works truly require vacant possession. In a commercial lease, it is up to the parties to negotiate how the relocation clause will operate.

Often, the landlord does not need a specific reason for the relocation. For instance, it can simply be because the landlord can obtain higher rent from a different tenant.

How to End a Lease Factsheet

A factsheet that sets out the three ways to end a commercial lease in Australia: surrendering your lease, assigning it or subletting it.

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Key Takeaways

Break clauses allow one or both parties to end a lease early. As a commercial tenant, understanding your rights when a landlord decides to use a break clause is paramount. Common break clauses in a commercial lease include:

• damage and destruction clauses;
• resumption clauses; and
• relocation clauses.

All of the above clauses can interrupt your business and cause frustration if you were not aware a landlord had the power to do so under your lease. 

To learn more about break clauses in your commercial lease, our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.