Beware of break clauses – Goldman Sachs International v (1) Procession House Trustee Ltd (2) Procession House Trustee 2 Ltd (2018)
Earlier this month, the High Court ruled that a tenant of office premises was able to bring its lease to an end, exercising the break clause, five years before the expiry date, which in effect has saved them over £20 million pounds. This was on the basis that the tenant could provide vacant possession and had paid the rent up to date.
What is a break clause?
A lease for a specified term may include an option for one or both parties to end the lease before the contractual expiry date.
If the lease is silent as to which party may exercise the break clause, it may only be exercised by the tenant. However, in practice most leases will note whether the break clause is exercisable by the landlord or the tenant, or both.
Facts of the case
The lease was for a term of 25 years, with a rent of over £4 million per year.
The break clause in question stated that as long as the tenant was not in arrears and could provide vacant possession the lease was terminable by the tenant after 20 years.
Clause 23.2 of the lease 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 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.”
This would suggest that in order to pursue the break clause the tenant had to comply with both clause 23.2 and clause 11.
The landlord argued that the condition of the break clause meant that the tenant was to give the premises subject to clause 11, so that the tenant had to reinstate the premises in order to exercise the break clause.
However, the tenant argued that it could exercise the clause on the basis only that the premises were returned with vacant possession and they were not in any arrears with the rent. Furthermore, the tenant stated clause 23.2 did not contain any reference to conditionality. This clause was only a reminder of what would happen if the right to break was exercised.
The High Court favoured the tenant’s argument that on the correct construction of the lease clause 23 was a conditional requirement to exercise the break clause and clause 11 was merely a reminder of the tenant’s obligation in clause 23. The court also held that the requirements in clause 11 can be broadly interpreted, therefore it would not be a suitable condition.
The Court also took into account the fact that some of the wording in the clause was in brackets, which showed it was of lesser importance, and was to be shown as a reminder rather than a requirement.
This case shows the importance of clear drafting in a lease, otherwise it may not always reflect the correct intentions of the parties. In this case it was the landlord’s intention that clause 11 was one of the conditions to be satisfied when exercising the break clause and this was not reflected in the drafting.
However, it should be noted that the landlord has been given permission to appeal to the Court of Appeal, so this may well not be the end of this matter, given the sums involved.