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What is a Break Fee?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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    2003-2016
    Conjecture Corporation
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Also known as a kill fee, a break fee is a sum that is paid in the event that one party in a proposed business deal chooses to withdraw from the project before it is completed. Fees of this type are often part of the structure for mergers, joint projects between companies, and in other situations where one or both parties incur expenses as a result of their participation. The purpose of the break fee is to reimburse the partner who wished to move forward with the project for any expenses her or she did incur due to participation in the project.

One of the most common examples of the application of a break fee is when a merger or acquisition does not go as planned. For whatever reasons, one party chooses to not go through the business deal, effectively creating a situation that is known as a de-merger. This leaves the other partner or partners having to absorb the expenses incurred as they sought to complete the merger process. The partner who chooses to pull out of the deal pays an agreed upon amount of money to the other partners as a means of partially offsetting their investments of time and money in the merger process.

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Fees of this type are not limited to situations involving large corporations that have entered into a deal to become a single unit. Publishers routinely include the break fee in any contract that is extended to a writer. Usually referred to as a kill fee in this instance, the idea is that if the publisher initially accepts work produced by the writer and later chooses to not publish the work, the writer will receive partial compensation for his or her work in the form of a fee. In many cases, the writer retains the rights to the work produced, and can seek to sell the manuscript or text elsewhere.

It is not uncommon for a break fee to also be included in leasing agreements. This application commits the tenant to paying out the remaining amount due on the lease in order to bring an end to the contract. At the same time, if the owner wishes to terminate the lease early, and for reasons that are not addressed in the agreement, the terms and conditions that relate to the fee may require that the tenant is provided with some sort of compensation. As with other applications, the idea is to offset the expenses incurred by the party who was willing to fulfill the terms of the contract, but cannot do so because of the actions of the other party.

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