Break Clauses – The Tenant Finally Catches a Break

A break clause in a commercial lease can often be a handy tool for a landlord and a tenant. From a tenant’s perspective, it allows them to exit the lease early (maybe because it has outgrown the premises or needs to downsize). For a landlord, if they decide to redevelop the property or have another tenant on board that is willing to pay more rent, getting the tenant out of the property early can be useful.

However, if a tenant exercises its contractual right to break the lease, the landlord may not always welcome this as the landlord may not want to see its paying tenant leave. Which is why, in most leases, the landlord will impose various conditions on the tenant if it wants to exercise its break (i.e. the tenant must comply with certain conditions if it wants to leave on the termination/break date).

The most common conditions are that the tenant must:

1. give prior written notice; and
2. pay all rent due under the lease; and
3. give vacant possession of the property.

Additional Reading: Break Clauses – Beware of the Break Block

Tenants are keen to get out of their break condition obligations, whereas landlords are keen to see them fully and strictly complied with (because if they have not been complied with, the break has not been operated correctly and the tenant must stay).

Courts are frequently asked for their interpretation of the break conditions. None compliance of these conditions can lead to a messy break up which is why break clauses are still a highly litigious area. Case law has been able to give some ultimate guidance on how break conditions should be treated but of course, every case will fall on its own facts.

Goldman Sachs v Procession House

In the recent case of Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 Limited, the court was asked to consider the vacant possession condition and whether it included a reinstatement obligation.

Here the tenant, Goldman Sachs, had the right the break its 25-year lease of offices in London in the 20^th year. The rent payable under the lease was £4 million per annum. By breaking the lease, the tenant would save (but the landlord could lose) £20 million in future rent. The break was exercisable on 12 months and 1-day prior written notice.

The tenant was also to comply with the following condition contained in clause 23.1 of its lease: “subject to the Tenant being able to yield up the Premises with vacant possession as provided in Clause 23.2”.

Clause 23.2 read “…and the Tenant shall yield up the Premises in accordance with clause 11 and with full vacant possession…”.

Clause 11 of the lease set out the tenant’s reinstatement obligations. At the end of the term, the tenant was 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 than described in the Works Specification” (which was attached to the lease).

Conditions of the break

It was accepted by both parties that vacant possession had to be given. However, it was not agreed that, in order for the break to be effective, clause 11 had to be fully complied with as a condition of the break. The tenant had already vacated the premises, so if compliance with clause 11 was a condition of the break, this would have meant the break was ineffective. If it was not a condition of the break, then the break would be effective and the landlord would have lost its tenant.

The court interpreted the relationship between clause 23.1 and 23.2 to mean that clause 23.2 was only adding emphasis to the vacant possession requirement set out in clause 23.1 (see the bold wording in the clauses above). Clause 11 gave additional and confusing obligations on the tenant which, the court held, went beyond the requirements and meaning of vacant possession. Clause 23.2 simply acted as a reminder of vacant possession rather than adding anything new.

The court held that if the landlord wanted clause 11 to be a condition of the break, the landlord should have set this out explicitly in the lease.

The courts adopted an objective test in coming to its conclusion and looked at the drafting of the break clause from the view of a reasonable business person and what was intended 20 years ago when the lease was originally drafted.

Summary

It’s important to note that the courts’ decision did not mean that the tenant didn’t have to comply with clause 11 at the end of the term, it still did. But it did mean that by failing to comply with the clause the tenant did not lose its right to break the lease, as clause 11 was not a break condition.

Tenants will undoubtedly welcome this decision. Landlords should also take from this decision the importance of taking care in their drafting and being particularly clear on what conditions they want satisfying for a break to be operated.

BHW regularly advise both commercial landlords and tenants in relation to their lease agreements and break clauses. For further information contact Raj Hundal on 0116 402 7249 or email raj.hundal@bhwsolicitors.com.