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Contract Law: Exercising an Option to Terminate a Contract

Monday, 2 April 2012

Economic uncertainty or changes in circumstances will often lead businesses and individuals to reconsider their contractual arrangements. Without specific termination provisions, exiting a position or renegotiating an agreement may be very difficult if one party is intent on holding the other to the original terms.

Although many contracts do contain termination clauses, their exercise will usually require that certain conditions are strictly adhered to before termination is deemed effective.

The Option to Terminate

Termination provisions are generally structured as options and, as with other types of option, necessary conditions must be met for them to be exercised. Termination clauses are commonly found in leases in the form of break clauses, charterparty contracts in the form of withdrawal clauses and finance contracts in the form of repossession clauses, to name some common examples.

A break clause in a lease is normally subject to strict conditions. These often relate to performance of the tenant’s covenants or a landlord’s proposed redevelopment of the property. In addition, strict time limits are imposed on the exercise of a break clause, non-compliance with which may invalidate an attempt to terminate the lease. This can even be as simple as an incorrect notice period.

Similarly, withdrawal clauses in charterparty contracts also require the party exercising the clause to adhere strictly to its conditions. Numerous examples exist of charterparties failing to comply with notice periods or other conditions and, as a consequence, failing to terminate the contract.

The Business Efficacy of Termination Conditions

Although it can be seen that exercising a termination clause has its difficulties, courts will not interpret their construction in such as way as to make their exercise impossible.

By way of example, a landlord wishing to end a long lease on a fixed break date in order that it might use the premises for its own business, does not necessarily have to require immediate use of the premises at that date. It is enough that at some point the landlord will require at least part of the premises during the term of the lease.

Termination options must be exercised with care to ensure that they are effective. If you need advice regarding this or other contractual matters, Rollingsons has experienced lawyers who can help you; for more information please contact James Crighton via e-mail or by phone on 0207 611 4848.