Break clause construed against the Landlord

The High Court held in the unreported case of Goldman Sachs International v Procession House Trustee Ltd (2018) that a tenant could sufficiently exercise a break clause in a lease by yielding up the premises with vacant possession and arrears as long as the arrears were all paid, without having to comply with a separate reinstatement yielding up option. The Court applied the contra proferentem rule by stating any ambiguity in what was required by the tenant to exercise the break clause, would be construed against the landlord.

The Facts

The tenant occupied the office premises from 29 September 1999 at a rent of £4 million per annum and sought to determine the lease by exercising the break clause.

The following clauses were the subject of the dispute:-

Clause 23.1 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 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 (Headed “Yielding Up”) stated that “unless not required by the landlord, the tenant shall at the end of the term, remove any alteration 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 described in the Works Schedule”.

During the term of the lease it was accepted, the tenant had fitted the premises out with partitions and other structures.

The Dispute

The parties agreed that to exercise the break clause the tenant had to have paid its arrears and to deliver up the premises with vacant possession. They were in disagreement however on whether the tenant was required to yield up the premises in accordance with clauses 23.2 and clause 11 of the Lease, i.e. whether the tenant had to reinstate and remove the particulars and other structures it had erected during the term of the lease.

The Tenant’s Argument

  • The tenant’s argument was that there were only two conditions that had to be complied with as per clause 23.1, i.e. they only had to provide vacant possession and have paid their arrears.
  • The tenant agreed clause 23.2 could only be considered after serving a genuine break notice on the landlord.
  • Clause 11 only demonstrated how the Tenant was to yield up once the pre-conditions to break the lease had been met and therefore were not conditions when seeking to exercise the break clause properly.

The Landlord’s Argument

  • The landlord argued there were a number of conditions to satisfy the break including the requirement to reinstate. It agreed the words in clause 23.1 “as provided in clause 23.2”, and similarly the entirety of clause 23.2, would become redundant if they were not to be construed as pre-conditions to exercise the break.

Decision

The Court held that there were only two pre–conditions in order for the tenant to determine the lease and for the break clause to be operative:-

  1. The tenant must not be in arrears; and
  2. To yield up the premises with vacant possession on the determination date.

Clause 11 would only come into effect once the tenant had complied with the pre-conditions as this would provide details as to what the tenant was to do next. The requirement to reinstate was not a condition that needed to be satisfied to exercise the break clause.

Clause 23.2 of the Lease

  • The Court further held that the use of brackets in clauses 23.1 and 23.2 was merely a reminder to the tenant as to what was required after the conditions had been complied with.
  • The tenant’s interpretation was more natural as a matter of language notwithstanding the fact it made clause 23.2 redundant.

Clause 11 of the Lease

  • Clause 11 could not be conditional to determine the Lease.
  • It contained less than precise conditions and even a trivial breach of this clause could have meant the tenant would be unable to exercise the break.
  • Subjective language such as “to the reasonable satisfaction of the landlord”, “materials of comparable quality” and a 14 page Works Specification casted ambiguity on what was required to validly exercise the break.
  • If the Landlord had wanted clause 11 to operate as a condition of the break then it should have made this explicitly clear.

The Court applied the contra proferentem rule which states that where there is doubt about the meaning of the lease, the words will be construed against the person who put them forward. Accordingly, the tenant was only liable to give vacant possession and to pay the arrears, but was not required to reinstate, in order for the break to be operative.

The Court has subsequently granted the landlord permission to appeal to the Court of Appeal.

For further information please contact the Real Estate Disputes Team at Hamlins.