Breaking up is hard to do. How to get it right first time
03 / 10 / 2019
A break clause in a commercial lease offers flexibility to the party with the benefit of the right to terminate. This can be either the landlord or the tenant, or both.
When conditions are applied to a break clause (a conditional break clause), great care must be taken to ensure that all requirements are met within the time limits set out in the lease. Clear and unambiguous drafting of the break clause is important so that the lease can be successfully terminated.
The recent case of Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 Limited  EWHC 1523 (Ch) highlights the potential pitfalls of ambiguous drafting. Goldman Sachs (the Tenant) was granted a lease for a 25 year term with a tenant’s break option on the expiry of the 20th year. Before exercising the break option, the Tenant made an application to court for determination of the construction of the break clause and the conditions required to operate it.
The break clause required that the Tenant have no rent arrears and yield up the premises “in accordance with Clause 11 and full vacant possession”. Clause 11 required the Tenant to “remove any alterations and additions”, and “reinstate the premises to its original layout and to no less a condition than as described in the Works Specification”.
It was unclear whether the Tenant was required to reinstate the premises in order to exercise the break option (which was the landlord’s position), or if the wording stated the Tenant’s obligations after the break option had been operated (which was the Tenant’s position).
Modern case law suggests that the courts now take a literal approach to interpretation, considering what is written rather than the intentions of the parties, whether or not this results in a bad bargain for one of the parties. The courts as such are unlikely to step in to correct poor or ambiguous drafting.
The High Court agreed that both parties’ interpretations of the clause were possible however, the “natural and ordinary meaning” of the words imposed a single condition: that the Tenant yield up with vacant possession. It was held that this was a more typical interpretation of the clause which made commercial common sense.
The Court applied the “contra proferentem” rule that a clause considered to be ambiguous should be interpreted against the interests of the party which sought to rely on it. As the landlord had applied conditions to the break clause, it was implicit that the landlord ensured that the break clause was drafted with absolute clarity. Not only was it unclear whether the premises should be reinstated before the break option could be operated, but the general nature of the drafting indicated it was not a suitable condition of a break clause which requires strict compliance.
The Court gave particular weighting to the financial consequences to the Tenant who would be obliged to continue paying rent at £4 million per annum for a further five years if they failed to exercise the break option successfully.
Separately it was noted that if the condition of the premises failed to comply with Clause 11 on the break date, the landlord could claim for damages from the Tenant for breach of a lease covenant.
The Court found in favour of the Tenant. Overall the case suggests a more tenant-friendly and commercially-minded approach taken by the courts in interpreting the construction of break clauses.
It is extremely important to ensure break dates are diarised and to allow sufficient time to obtain legal clarification of the meaning of the wording of the clause if required.