Break notices: give me a break?

Break notices: give me a break?

Goldman Sachs International v Procession House Trustee 1 Limited [2018]

Summary

A tenant's break option was conditional on compliance with the requirement to yield up the premises with vacant possession on the break date. However, the High Court has ruled that this condition did not extend to requiring full compliance with the tenant's obligation to reinstate.

The facts

Procession House Trustee 1 Limited and Procession House Trustee 2 Limited (the "Landlord") leased office premises at Procession House, 55 Ludgate Hill and 110 New Bridge Street to Goldman Sachs International (the "Tenant"). The lease was for a term of 25 years and rent was payable at £4million per annum. The Tenant had the option to terminate the lease on the expiry of the 20th year.
In view of the consequences of failing to exercise its break option correctly, the Tenant brought pre-cautionary proceedings to ask the Court to clarify the conditions attached to the option, in advance of exercising it.

The applicable lease terms

Clause 23.1 stated that the tenant could exercise its right to break the lease "subject to the Tenant being able to yield up the Premises with vacant possession as provided in clause 23.2".
Clause 23.2 stated that "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)".
Clause 11.1 stated that "unless not required by the Landlord, the Tenant shall, at the end of the Term, 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 shall reinstate the Premises to their original layout and to no less a condition than as described in the Works Specification".
Clause 11.2 stated that "at the end or sooner determination of the Term the Tenant will quietly yield up the Premises to the Landlord in such condition as is set out in the Works Specification".
Term is defined as “a term of 25 years… (but subject to clause 23)...

Arguments before the Court

The Landlord argued that the right to break the lease was conditional upon both providing vacant possession and reinstatement, whereas the Tenant argued that it was only conditional upon providing vacant possession.

There was no dispute that the Tenant would have to ensure there were no arrears on the break date, that it would need to provide vacant possession and that it was contractually bound by its obligations under clause 11 upon expiry or termination of the lease. However, it was disputed whether the break was conditional on compliance with clause 11; it was extremely important for the Tenant to clarify the position due to the high level of rent and the fact that it was no longer in actual occupation.

The decision

The Court held that a failure to comply with the requirements of clause 11 would not result in the loss of the Tenant’s break right.

It is a well-established principle that the Court will construe any ambiguity in a contractual agreement against the party who is trying to rely on it. In this case, it was construed against the Landlord who was trying to rely on clause 11 as a break condition.

Break conditions must be construed strictly but the scope of clause 11 was not entirely clear as the drafting was ambiguous. For example, its compliance was linked to making good any damage caused by reinstatement to the reasonable satisfaction of the Landlord, which would not have been within the Tenant's control. The Court held that clear wording would have been required if the Landlord was going to be able to enforce strict compliance with clause 11 as a condition of the break. The wording in the lease was insufficiently clear on these facts.

For completeness, it was noted that if the Tenant was in breach of its obligations under clause 11 at the end of the lease, the Landlord would still be entitled to pursue the Tenant for damages, most likely as part of a normal dilapidations claim.

Our comments

Efficient forward planning by the Tenant allowed it to resolve this dispute in advance of exercising its right to break, rather than being engaged in litigation after the event. The stakes were high as, due to the level of annual rent, the Tenant could have potentially been on the hook for a further £20million in rent if the break was not validly exercised, together with other costs such as business rates.

When drafting a break clause, it is recommended that break conditions are set out in the same clause. This will avoid the situation that arose here where the clauses were linked. Clear wording should also be used to avoid potential ambiguity.

Finally, it should be noted that the Landlord has been granted permission to appeal the decision to the Court of Appeal.