Tenant catches a break


21st May 2018

A recent High Court decision has highlighted not only the power of punctuation, but the need for tenants to take proactive legal action when they wish to terminate their lease early.

The judgment in Goldman Sachs International v (1) Procession House Trustee Ltd and (2) Procession House Trustee 2 Ltd turned on the construction of the break clause in a commercial twenty-five year lease.

The break clause was exercisable after twenty years as long as the Tenant was not in arrears – both conditions of which were satisfied.

Clause 11

The issue in dispute centred on the fact that the break clause further stated, in parenthesis, that “the tenant shall yield up the premises in accordance with clause 11 and with full vacant possession”. Clause 11 was entitled “Yielding Up” and required the Tenant to reinstate the premises to their original condition.

The wording of Clause 11, with phrasing such as “to the reasonable satisfaction of the Landlord”, coupled with the reality that the Tenant had fitted out various structures in the Property,  meant that trivial breaches were very possible. If compliance with Clause 11, as the Landlord sought to argue, was a pre-condition of the break clause then the Tenant would be in a difficult position.

Faced with uncertain drafting, the Tenant knew that the Landlord could obstruct the break and force the Tenant to fulfil its obligations under the lease – including payment of an annual rent of over £4 million.  Sensibly, the Tenant sought clarification from the courts before enacting the break clause.

The High Court determined that Clause 11 was not a pre-condition of the break clause. The use of brackets indicated that the reference to Clause 11 was merely a reminder of what would occur on the break clause, rather than creating a separate obligation before the break clause could become valid. Moreover, compliance with Clause 11 would not be a sensible or practical pre-condition, as the parties would not be immediately aware as to whether the break clause had been validly exercised due to the imprecise terms.

The importance of careful drafting

This case demonstrates the importance of careful drafting. The conditions attached to a break clause must be clearly defined.

Although it may have been the parties’ intention, when entering the Lease, for Clause 11 to be a pre-condition on the break clause, the confused drafting led to an imposed result. The High Court was willing to interpret a more natural reading of the Lease, even when this meant that certain phrasing became redundant, in order to reach a practical solution.

Tenants should be alive to the possibility of querying break clause pre-conditions via the courts. It is often more cost effective to incur legal fees than to invalidly attempt to break one’s lease and face continued rent charges.

It should be noted that the Landlord has been given permission to appeal so we await the Court of Appeal’s interpretation as to whether the Tenant has indeed caught a break.

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