The importance of obtaining legal advice when exercising a break right in a lease cannot be overstated. Despite the flurry of case law in this area in recent years, tenants are still getting their fingers burnt and finding themselves tied into leases, with all the associated commitments, having failed to comply strictly with the requirements of the lease. It can prove to be a very costly mistake to make for the sake of perhaps trying to save what were considered to be unnecessary legal fees.
In our daily lives we are used to terminating contracts in relatively informal ways. Many companies will be happy with an email or even a telephone call. However, the same cannot be said about termination of a lease, which is a very particular species of contractual arrangement. Even the smallest error can be fatal and, as the decisions have shown, there is very little room for error.
Common Issues with Break Clauses
Recent cases have focussed on some of the following:
- Whether the break notice has been validly served;
- Whether the break notice contains the required information;
- Mistakes in break notices which contain a misdescription of the property or refer to the wrong parties;
- Whether a break notice is conditional or not (i.e. certain conditions have to be complied with for the break to be effective) and, if so, what are those conditions; and
- What is actually required by certain common conditions such as the requirement to give vacant possession or for there to be no arrears of rent.
As always, the case law can only give guidance and ultimately each case turns on its own facts and particular construction of the particular lease terms in question.
Goldman Sachs International v (1) Procession House Trustee Ltd and (2) Procession House Trustee 2 Ltd
Solicitors acting for tenants have taken on board the guidance of recent case law and are now more alive to the potential pitfalls when drafting break clauses. The High Court case of Goldman Sachs International v (1) Procession House Trustee Ltd and (2) Procession House Trustee 2 Ltd (2018), however, is a good example of confusing drafting (albeit relating to an historic lease) leading to uncertainty as to what was required to exercise a break right. Not running any risks, the tenant, Goldman Sachs, applied to the Court ahead of the break date for a determination of what it was required to do. As the yearly rent was £4 million, it was clearly cost effective to seek such clarification.
Goldman Sachs occupied premises pursuant to a lease for a term of 25 years from 29 September 1999. It had the benefit of a break right, contained within clause 23 of the lease, exercisable after 20 years so long as it was not in arrears of rent and, as per clause 23.1, “subject to the tenant being able to yield up the premises with vacant possession as provided by clause 23.2”. Clause 23.2 provided 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 related to the yielding up obligations and 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”.
The confusion is evident from the drafting: in order to effectively exercise the break, did the tenant only have to ensure that there were no arrears of rent and to give vacant possession or did it also, also have to comply with Clause 11 which would be a far more onerous obligation? The requirements of Clause 11 were open to argument which would present the tenant with real difficulties in terms of compliance, as the landlord could potentially always frustrate the effective exercise of the break. Even if the landlord was not minded to do this, it could use the uncertainty surrounding the drafting to secure a higher degree of compliance with the yielding up clause than might be necessary, at considerable additional cost to the tenant.
Construction of Lease Terms
On matters of contractual construction, the recent trend has been for a literal approach, irrespective of whether this results in a bad bargain for one party, particularly following the case of Arnold v Britton (2015) UKSC 36. In other words, greater weight is given to the words used in a contract rather than the court re-writing agreements to reflect what it considers to be the commercial common sense (known as the ‘purposive’ or commercial approach). That said, the commercial approach does still have its place and words should be read in their documentary, factual and commercial context. The application of the differing principles in practice is not always straightforward.
In this case, however, the Court held that, on the correct construction of the lease, clause 23.2 (and therefore compliance with clause 11) was not an additional condition with which the tenant had to comply to satisfy the break, even if this mean that clause 23.2 would effectively serve no purpose and could be ignored. It considered that the requirements of clause 11, being so open to interpretation, were not suitable as a precondition for a break clause where the parties needed to have certainty as to whether the break had been exercised or not. Furthermore, the lease drafting was traditional of its day; clause 23.2 formed part of the break right set out in clause 23 and its purpose was to confirm the consequences of the tenant exercising the break option. It was noted that the use of brackets served as a reminder of what was required at lease termination, as opposed to having the effect of imposing an additional obligation.
This is a topical case relating to contractual interpretation. It seems most unlikely that, at the time of entering the lease, it was the parties’ intentions that compliance with clause 11 was to be one of the conditions that had to be satisfied to exercise the break but, if so, this was not sufficiently reflected in the drafting. Interestingly, the landlord has been given permission to appeal to the Court of Appeal.
As good practice, solicitors should review and report to clients on key lease clauses prior to completion to ensure that there can be no scope for dispute as to their meaning and effect.