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Tenant's Break Options in Lease

Lease - break option - tenant’s break option not conditional on compliance with reinstatement obligation

The High Court recently considered whether, on its true construction, a tenant’s break option was conditional on compliance with the reinstatement obligation in the lease, as well as the requirement to yield up the premises with vacant possession on the break date.

A break clause can be included in a fixed term lease allowing either the landlord or the tenant (or both) to terminate the lease early. Any conditions attached to the right to break must be strictly performed.

 

If you require further legal advice, please contact our specialist Susan Harrison, Commercial Property, on 01243 218 184 or via email at Susan.Harrison@glanvilles.co.uk.

 

In this instance, a tenant (G) applied for a determination of the correct construction of the extent of the conditions attached to the break clause in its lease of office premises in central London. G sought a determination, in advance of exercising the break, to clarify the conditions attached to the break clause to avoid a future dispute with its landlord (P).

G’s lease was for a term of 25 years, at an annual rent of £4 million, with a tenant’s break option on the expiry of the 20th year (28 September 2020) exercisable on at least 12 months’ and one day’s written notice.

The break option (clause 23.1) stated 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 read “On 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 of the lease contained the tenant’s reinstatement obligations. It required the tenant at the end of the term (unless not required by the landlord) to “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 “to reinstate the Premises to their original layout and to no less a condition that described in the Works Specification” (which was attached to the lease). This obligation was subject to two qualifications, relating to specific upgrades that would not require reinstatement and the tenant’s ability to substitute materials in certain circumstances.

 

It was agreed between the parties that the break clause was conditional on G yielding up the premises with vacant possession on the break date. The parties also agreed that the tenant was contractually obliged to comply with the reinstatement clause on expiry or termination of the lease. However, P argued that the addition (in clause 23.1) of the words “as provided in clause 23.2”, together with the wording of clause 23.2 itself, meant that the break option was also conditional upon full compliance with clause 11.

Given the substantial passing rent and the fact that G had already vacated the premises, successful exercise of the break option would mean a saving of around £20 million. It was therefore very important for G to know in advance exactly what it needed to do to operate the break successfully.

Modern case law stresses that contract interpretation involves broad principles, rather than strict rules, for ascertaining the parties’ intention. An objective test is used for ascertaining the intention of the parties to the contract. Their actual or subjective intentions are irrelevant. The standpoint of a reasonable businessperson is adopted. Where the contract is in writing, what the parties have written, rather than what they intended to write, constitutes the agreement.

 

Therefore, the court found in favour of G, holding that the natural and ordinary meaning of the break clause was to impose a single condition to yield up with vacant possession. Under the correct construction of clause 23.1, the break option was conditional on the tenant yielding up with vacant possession. It was not conditional on compliance with the reinstatement obligation in clause 11.

Looking at the wider context, it was clear to the court that the reinstatement obligation in clause 11 went far beyond the usual requirements of vacant possession. Furthermore, the drafting of the reinstatement clause allowed room for argument between the parties about the specific requirements for compliance, using phrases such as “to the reasonable satisfaction of the landlord” and “materials of comparable quality”. Therefore, the reinstatement clause was not suitable as a condition of a break clause, where certainty is paramount.

 

Whilst this decision turned on the construction of the particular lease in question, tenants will welcome the sensible approach taken by the court. The need for strict compliance with break conditions can cause great problems for tenants who can lose their right to break because of a trivial breach, rendering the right to break worthless. It is incumbent on a landlord to make the extent of any such conditions very clear. If P had wished to provide for strict compliance with clause 11 as a condition of the break, it should have stated this clearly in the lease.

The decision is a useful reminder to both parties to ensure that any break conditions are clearly drafted, leaving no doubt about what needs to be done for a break notice to be effective.

However, P has been granted leave to appeal, so the matter may not yet be finally resolved.

 

Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 Limited [2018] EWHC 1523 (Ch).