The recent High Court decision in Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 Limited [2018] EWHC 1523 (Ch)  considered whether the exercise of a tenant’s break clause was conditional on compliance with the reinstatement obligation, as well as the requirement to yield up the premises with vacant possession on the break date.

Background

Break option can be included in leases allowing either the tenant or the landlord (or both) to terminate the lease early at fixed points. Any conditions to which the option is subject must be strictly performed.  Dependent on the exact wording of the break clause, minor breaches of covenants can result in tenants losing their right to break.

Interpretation of contracts

Modern case law stresses that contract interpretation involves broad principles, rather than strict rules, for ascertaining the parties’ intentions. An objective test is used for ascertaining the intentions of the parties to the contract, adopting the perspective of a reasonable businessperson. Where the contract is in writing, what the parties have written constitutes the agreement, instead of what they may have intended to write. If an agreement is ambiguous, it is interpreted to the benefit of the party to whom the wording was originally provided.

Facts

Prior to exercising their break option, a tenant brought a claim for determination of the correct construction of a break clause in its lease of office premises in Central London.

The lease was for a term of 25 years, at an annual rent of £4 million. The tenant’s break option was exercisable on the expiry of the 20th year, on at least 12 months’ and one day’s written notice.  The break clause stated:

“subject to the Tenant being able to yield up the Premises with vacant possession as provided in Clause 23.2“.

Clause 23.2 read:

“On expiration of such notice, the Term shall cease and determine (and the Tenant shall yield up the Premises in accordance with clause 11 and with full vacant possession)“.

Clause 11 of the lease required the tenant at the end of the term, unless not required by the landlord, to:

“remove any alterations or additions made to the Premises (and make good any damage caused by that removal to the reasonable satisfaction of the Landlord)” and “to reinstate the Premises to their original layout and to no less a condition that described in the Works Specification“

This obligation was subject to two qualifications, relating to specific upgrades that would not require reinstatement and the tenant’s ability to substitute materials in certain circumstances.

Both the landlord and the tenant agreed that:

  1. The break clause was conditional on the tenant yielding up the premises with vacant possession on the break date.

  2. The tenant was contractually obliged to comply with Clause 11 on expiry or termination of the lease.

The landlord argued that the addition the break clause of the words “as provided in Clause 23.2” meant that the tenant’s exercise of the break option was conditional upon full compliance with Clause 11.

As the tenant had already vacated the premises, successful exercise of the break option would mean a rent saving of around £20 million. The tenant therefore sought determination by the Court as to what else was required from them to ensure successful compliance with the break clause.

Decision

The Court found in favour of the tenant.  It confirmed that the correct interpretation of Clause 23.1 was that the break clause was conditional on the tenant yielding up with vacant possession but not conditional on compliance with the reinstatement obligation in Clause 11.

The Court concluded that the “natural and ordinary meaning” of Clause 23.1 was to impose a single condition to yield up the premises with vacant possession.   As such, it was not necessary to repeat the reference to vacant possession in Clause 23.2, or to refer to Clause 23.2 in Clause 23.1.  However, the court was satisfied this was included for emphasis and to remind the tenant of the requirement for vacant possession, rather than to add anything new.

The Court also concluded that the reinstatement obligation in Clause 11 went far beyond the usual requirements of vacant possession, and that it was difficult to define precisely what was required by Clause 11 as the drafting allowed scope for disagreement with the use of phrases such as “to the reasonable satisfaction of the landlord” and “materials of comparable quality“.  Consequently, compliance with Clause 11 (as drafted in this lease) was not a suitable condition to be attached to the break clause as it did not enable either party to proceed with any certainty.

The Court also reminded the landlord that if the state of the premises on the break date failed to comply with Clause 11, the landlord would still be entitled to claim damages from the tenant in the usual way.

Comment

Whilst this decision turns on the drafting of the particular lease in question, there is a lesson to be learned by landlords and tenants. Break clauses, and any conditions attached to them, must be clearly drafted to ensure that both parties are left in no doubt as to what needs to be done for a break notice to be effective. Any condition that includes an element of subjectivity should be avoided in favour of objective, or better still, definitive conditions.

As a post-script though, the landlord in this case has been granted permission to appeal, so the matter may not yet be resolved!

If you are looking for advice relating to your commercial lease please get in touch with Farleys’ commercial property team on 0845 287 0939 or email us today.