Goldman Sachs International v (1) Procession House Trustee Ltd (2) Procession House Trustee 2 Ltd (2018)

The High Court ruled last week (3 May) that a tenant of office premises could bring its lease to an end five years before the contractual expiry date (thus saving over £20 million) by exercising the break clause in its lease, so long as it yielded up the premises with vacant possession and there were no rent arrears. It was not a further condition of the break clause that the tenant reinstate the premises to their original layout pursuant to a separate yielding up clause.

The break provisions

The lease was for a term of 25 years, at a rent of over £4 million per annum. There was a break clause at clause 23, exercisable by the tenant after 20 years, so long as it was not in arrears. Clause 23.1 also 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 stated:

"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 was headed "YIELDING UP". Clause 11.1 stated:

"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 provided that the tenant would yield up the premises in accordance with the Works Schedule, subject to some further detailed provisions.

The parties' positions

The tenant claimed it could exercise the break clause on condition simply that it gave back the premises with vacant possession and there were no rent arrears. The landlord argued that it was also a condition of the break that the tenant give back the premises pursuant to the yield-up clause which also meant reinstating the premises.

The tenant submitted that all that was meant in cl.23.1 by its reference to cl.23.2 was that the tenant had to yield up with vacant possession, and that cl.23.2, which did not contain the language of conditionality, merely reminded the parties of what would happen if and when the right to break was exercised. The landlord submitted that the difficulty with the tenant's construction was that it made the words "as provided in clause 23.2" in cl.23.1 and all the words in cl.23.2 redundant.

The decision

The Court held that whilst the break was clearly conditional on the tenant not being in arrears at the break date and the premises being yielded up with vacant possession, the break was not conditional upon the tenant having complied with all the requirements of clause 11. The Court favoured the tenant's argument that the reference in clause 23 to clause 11 was effectively a reminder of the tenant's obligations and was intended to make it clear that clause 11 would apply in situations where the break was exercised. Although the reference to clause 11 was effectively redundant (in the sense that the relevant obligations would have applied even if such reference had not been made), the Court nevertheless held that the tenant's interpretation provided a more natural reading of the language. The Court took into account the fact that some of the relevant wording was in brackets, which indicated that it might be of lesser importance and was intended to serve more as a reminder than to impose a fresh obligation.

Comment

This is a tenant-friendly decision and is a reminder that leases need to be carefully drafted so as to clearly and unambiguously specify any conditions which are to attach to break clauses. It should be noted, however, that the landlord was granted permission to appeal to the Court of Appeal and so the matter may be revisited.

The case is also an illustration as to how tenants in a similar situation of doubt over what pre-conditions have to be satisfied in order to take advantage of a break right, might consider going to court to resolve the issue well before the actual break date. This procedure enables clarity as to obligations in advance, rather than leaving the issue to be litigated after the event, when an adverse ruling for a tenant could have very damaging consequences.

This case summary incorporates material originally published on www.lawtel.com on 9/5/2018 and is reproduced with the permission of Thomson Reuters.