Many modern commercial leases contain provisions allowing the landlord, or the tenant, or both parties, to opt to end the lease early at some point during the term of the lease. These clauses, known as break options, have particular relevance in the current economic climate, where tenants in particular are more likely to be looking for ways in which they can validly end their obligations in relation to premises, whereas of course landlords are particularly keen to maintain the income stream that flows from keeping a tenant in place and paying the rent.

It is not just in difficult economic circumstances, however, that the exercise by a tenant of a break option is an unwelcome event for a landlord. Generally, most landlords mostly want to maintain the status quo - steady income from the rent from tenants who stay put for the duration of the lease - and any notice purporting to exercise a break will be scrutinised carefully to ensure that there are no grounds for invalidity. Best practice therefore for tenants and their advisers is to adhere scrupulously to the provisions in the lease concerning the conditions for exercising any break and it is here, where clear unabiguous drafting helps both parties to be sure of achieving their desired end result without dubiety or dispute. The recently decided appeal in the case of Trygort (Number 2) Limited v UK Home Finance Limited and Another demonstrates the difficulties that can arise where the wording is apparently capable of more than one interpretation.

Making a break for it

Trygort let to UK Home Finance commercial premises at 110 West George Street, Glasgow, for a period of three years from 28 May 2004. On 24 December 2005, UK Home Finance moved out of the premises, having previously issued a notice purporting to exercise the break option contained in the lease.

The lease provided for either party to be able to opt to terminate the lease early at any time after 31 March 2005, on giving not less than six months' notice. However the lease also contained a proviso that the tenant wouldn't be entitled to issue any break notice terminating the lease if it has been in breach of its obligations to the landlord in terms of the lease.

Present or present perfect tense?

The effect of this proviso was the subject of the dispute. Trygort contended that the option to break could not be exercised if the tenant had been in breach of contract at any stage during the currency of the lease, regardless of whether or not it was in breach at the time of exercising the break, the words "if it has been in breach" denoting a breach at any time, and that this was the plain ordinary meaning of the words. If it had been intended that the proviso should relate only to subsisting breaches, then the present tense - i.e "if the tenant is in breach of its obligations" - should have been used.

UK Home Finance had in fact been in breach of its obligations under the lease in the past, having failed to make payment of landlord's expenses and settle the SDLT payment within the timescales specified in the contract, and having persistently been late in payment of the rent, but it was not in breach of any of its obligations at the time it served the break notice. It suggested that the phase in the lease, being couched in the present perfect tense, meant that any breach would have to still be continuing for the proviso to apply, otherwise, to apply to former breaches, the wording should have referred to the tenant being in breach of its obligations at any time.

Past or present breach?

In the event, the arguments of both parties were rejected as the Lord Ordinary felt that there was uncertainty with both arguments and that both meanings were possible.

Instead he looked at what was the commercially sensible construction of the words, and in doing so relied significantly on the English decision from 1988 in the case of Bass Holdings Limited v Morton Music Limited [1988] 1 Ch. 493. This case follows long standing authority in England for the approach that in such situations the breaches that would apply are subsisting breaches, not spent ones. The reasoning, which has a certain irresistible commercial resonance, is that the likelihood of total and absolute compliance by the tenant with every single obligation on it, at all times, throughout the duration of a full repairing and insuring lease, is practically impossible to achieve, so if that was the requirement before the option could be exercised, it would be virtually incapable of ever being applied. Consequently, the parties cannot have intended that to be the effect of such a clause. It is however perfectly natural for a landlord to expect a tenant not to be in breach at the time of exercising the break (although, as an aside, from a drafting point of view, it may be wise to exclude minor inconsequential breaches), although not to be concerned over past breaches. Indeed, he may be happy to see the back of a tenant who has a history of being in default of one type or another.

There is no such settled rule of law in Scotland, however, but the Lord Ordinary considered that the same commercial considerations could be said to apply in this case and this lease (which contained a full range of the usual obligations as to repair, maintenance and redecoration) and that therefore the break option had been effectively exercised, there being no subsisting breach by the tenant at the time of exercise.

A commercially pragmatic approach

Lawyers in Scotland are usually cautious, and rightly so, of relying on the decisions of English courts when determining the outcome in Scottish cases, particularly in relation to property and lease related matters, although very often in the latter instance, such decisions will be persuasive. The underlying laws can be subtly, and sometimes significantly, different, although there may appear to be similarities superficially.

The rationale of the Bass Holdings case however, albeit that it reflected settled English law, is rooted in commercial practicality, an approach that has no need of geographical or jurisdictional boundaries. Commercial pragmatism from the judiciary may be able to come to the rescue of ambiguous drafting, but it seems almost banal to suggest that the parties should acknowledge the commercial realities, adopt that approach when negotiating the terms of the lease, and translate the product of those negotiations into clear and unequivocal language in the contract.

For the full decision in the case of Trygort (Number 2) Limited v UK Home Finance Limited and Another click here