Another messy breakup…

18 May, 2018

Goldman Sachs International v (1) Procession House Trustee (2) Procession House Trustee 2 Limited

Unlike most new relationships, landlords and tenants often begin theirs with a dose of pessimism.  Both parties know they may not go the distance.  Better then to agree a clear set of rules to be engaged if one party (usually the tenant) wants out early.  But despite those sensible intentions, break clauses continue to be amongst the most commonly litigated terms of commercial leases.  So, can any lessons be learned from this latest decision from the High Court on the subject?

The break clause in this particular lease was operable by the tenant at year 20 of a 25 year term.  If it ended the lease early, the tenant would save itself over £20m in rent over the remaining 5 years of the term.

The conditions attached to the break right, in clause 23.1 of the lease, looked deceptively simple.  The tenant should not be in arrears on the break date.  In addition, the break right was expressed to be:

“subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2”

What does vacant possession look like?

You might expect clause 23.2 of the lease to have gone on to describe the circumstances of vacant possession that the tenant would be expected to adhere to in order to exercise its break right.  But where would be the fun in that straightforward approach?  Instead, the clause was drafted in this way:

“On the 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).”

So, the lease would end on the break date and the tenant would then give up vacant possession as described in clause 11.  In other words, the only conditions on the break right would be (a) for the rent to be paid up to date, and (b) for vacant possession of the premises to be returned to the landlord (within the general meaning of that phrase).  At least, that’s what the tenant understood the clause to mean.

But the landlord took a different view.  It considered that the lease would only come to an end on the break date if the tenant had given up vacant possession in accordance with the terms of clause 11.  So, who was right?

The £20,000,000 question

A lot was riding on the correct interpretation of the break clause.  If, as the landlord argued, the conditionality extended to the definition of vacant possession in clause 11, that would make matters far more difficult for the tenant.  It would have to remove any alterations and additions it had made to the premises and make good any damage caused in the process.  It would have to reinstate the premises to their original layout, and to the standard mentioned in a pre-existing schedule of condition.

The tenant issued proceedings in the High Court.  It sought a declaration to the effect that its right to break the lease was not conditional on the laborious requirements of clause 11.  The court agreed.  It said that, by referring to clause 11 in clause 23.2, the parties could not have intended to introduce another layer of conditionality to the break right.  In taking that view, the court was influenced by the fact that having to comply with clause 11 would make it difficult for the parties to know whether the break right had been exercised validly.  For example, it required the reinstatement work to be completed to the “reasonable satisfaction” of the landlord.

Falling into the right bracket

The court also accepted the tenant’s view that placing the reference to compliance with clause 11 within brackets reduced it to the status of a reminder to comply.  It should not be treated as a new, conditional obligation on the break right.

This was not to say the tenant did not have an obligation to comply with clause 11 at the end of the lease term.  It still did.  But the key point was that a failure to comply with the requirements of clause 11 would not result in the loss of the tenant’s highly valuable break right.

Summary

This case is an example of the long-established rule that the courts will construe any ambiguity in a contractual agreement against the party who is trying to rely on it (so the landlord in this case).  The landlord has been granted permission to appeal the decision to the Court of Appeal, so we may not have heard the last of the arguments over this particular break clause.  Even so, this case is a useful reminder for parties to a new lease to make sure that:

  • The conditions applying to a break clause in a lease (or any clause for that matter) are drafted clearly; and
  • The conditions are set out within the same clause of the lease (rather than through the use of linked clauses, which was the ultimate cause of the dispute in this case).