A court has construed a break option in favour of the tenant holding that it was not a condition of the exercise of the break option that the tenant should reinstate the premises to their original layout.
This was the decision of the High Court in Goldman Sachs International v Procession House Trustee Ltd. As yet, the case is unreported but we have seen a summary of it.
The tenant occupied office premises under a lease for a term of 25 years starting in 1999. The rent was over £4 million a year. The term was subject to a break clause, exercisable by the tenant after 20 years, subject to there being no arrears.
The break clause stated that the lease was terminable by the tenant 'subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2'.
Clause 23.2 said: 'On the expiration of [the break 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 was the yielding-up provision and required 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 shall reinstate the premises to their original layout .'
The tenant wanted to exercise the break right but an issue arose over just what the conditions required. Did the break clause require only payment of rent and delivery of vacant possession or did it also require compliance with the yielding up provisions in clause 11? The tenant applied to the court for a decision on this question.
It was common ground between the parties that the break clause required two conditions to be met: both that there were no arrears and that the tenant should yield up with vacant possession. The parties also agreed that clause 11 imposed contractual obligations on the tenant should it exercise the break. But the question was: did clause 23.2 impose those contractual obligations as a condition of successful exercise of the break option or did they simply act as a reminder to the parties?
The court concluded that all that was required was vacant possession. In reaching this conclusion the court considered the facts and their implications. The tenant had carried out fitting out works when it began to occupy the property and what would be required of it under clause 11 allowed room for argument. This was because clause 11 contained terms such as 'to the reasonable satisfaction of the landlord' and 'materials of comparable quality'. It also referred to a works specification with which the tenant had to comply when carrying out reinstatement works and yielding up. This was 14 pages long and it did not specify with precision what the tenant had to do.
The court concluded that clause 11 was not a suitable pre-condition for the exercise of the break option. A trivial breach would have meant that failure to comply absolutely rendered the break clause inoperable and neither party could be totally sure whether or not a break conditional on compliance with that condition would have been successfully exercised.
The court applied the contra proferentem rule. Essentially, this provides that, where there is doubt about the meaning of the contract, the words in doubt are construed against the person who put them forward. In the case of a lease, this is the landlord who drafted it. Applying this rule, the court found in favour of the tenant: compliance with clause 11 was not a pre-condition of the exercise of the break option.
Leave to appeal to the Court of Appeal has been granted
Cases involving the interpretation of contracts (which includes leases) are extremely hard to call. In this case, the court found sensible reasons to decide in favour of the tenant but it could quite easily have found differently. Such cases are necessarily decided on their precise terms.
However, giving the history of break clause litigation where so many tenants have found themselves scuppered by a failure to understand the exact scope of a break clause condition, this decision is to be welcomed for the clarity which it encourages.
The court underlined the lesson to take from it: it is incumbent on the parties to be clear what a tenant has to do to comply with a break option.
Goldman Sachs International v Procession House Trustee Ltd (unreported)