10th Jul 2018

The hidden dangers in tenant's break clauses

Typical present day commercial lease lengths are much shorter than they used to be – typically 3, 5 or 10 years with the tenant having the benefit of a break clause entitling it to terminate the lease at some point during the term. 

Attractive though this is to modern tenants, they should be aware of the potential pitfalls. Cleverly drafted break clauses can trip up the unwary.  An obvious example is a pre-condition which must be satisfied by the tenant before the break is deemed effective.  These must be strictly performed.  For example, a tenant should not agree that the satisfaction of the repair and decorating covenant is a pre-condition to the break, otherwise it may find that the landlord seeks to use the flimsiest of lapses as a means to defeat the break and keep the tenant on the hook for the rest of the lease term.

A recent case (Goldman Sachs International v. Procession House Trustees (2018)) has highlighted the need for such clauses to be clearly drafted.  The lease in question was granted in 2000 for a 25 year term, with a tenant’s break at the end of year 20.  The current annual rent is £4 million, so the numbers at stake here are significant. 

The break clause (23.1) provided that it was “subject to the Tenant being able to yield up the Premises with vacant possession as provided in clause 23.2.”  Clause 23.2 said: “On expiration of the 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 contained detailed tenant’s reinstatement obligations.  Given the high rent and that the tenant had already vacated the premises, it required to know in advance exactly what it must do to successfully exercise the break clause.

The parties agreed that there was an obligation on the tenant to give vacant possession, but disagreed over the interpretation of clause 23.2 and whether the break clause was conditional upon full compliance with clause 11.  The Court found in favour of the tenant concluding that, although both parties’ interpretations of the clauses were possible, the natural and ordinary meaning of clause 23.1 was to impose a single condition to the exercise of the break, namely the giving up of vacant possession.  The Court held that, if the landlord had wished to provide for strict compliance with clause 11 as a condition of the break, it should have been more clearly stated in the lease.

A sensible decision or one very lucky tenant?  The tenant is not out of the woods yet, as the landlord has been given leave to appeal the decision, however, the moral of the story is clear - leases should leave no room for doubt as to what the parties intend particularly, as in this case, the argument has taken place nearly 20 years after the lease was agreed. 

Richard Wheeldon is a Senior Consultant within Berwins' industry ranked Commercial Property team.  

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