When someone signs a commercial lease, they’re expected to continue making payments for the entire term of that lease. While residential leases often run for 12 months, commercial leases are sometimes longer. A tenant may sign a lease that is intended to last for 3 to 5 years, for example. At the end of this term, they may negotiate with the landlord to see if they want to extend the lease or sign another agreement.
That said, some commercial leases will use break clauses. These are essentially clauses that define how the lease can be broken early, laying out the specific reasons why this can be done and the steps that need to be taken. These can be beneficial for both renters and landlords, depending on how they’re used. If they are included in a lease agreement, both sides need to be well aware of how they work.
Why are break clauses used?
In some cases, a break clause may be tied to the financial success of the business. For instance, a business owner may be unsure if a certain location is going to be ideal for their new company. They will stipulate that they need to make a certain amount in annual revenue, or they’re allowed to walk away from the lease early. This reduces the level of risk that they face.
Another potential example is military service. If a tenant is a member of the military who could be called up or deployed, they may be able to run the business while they’re still in the United States, but they need a break clause so that they can walk away from that obligation if they have to go serve in the military.
These are just two examples, and there are many reasons why landlords may also want break clauses so that they can move on from a tenant when it’s in their best interest to do so. The key is simply for both sides to understand how the documentation is drafted and all of their legal rights and obligations under this agreement.