Conditional Break Clauses (We want prenup! We want prenup…yeah!)

Insights - 11/07/2018

The Court has recently been asked in the case of Goldman Sachs International –v- Procession House Trustee 1 Limited and Procession House Trustee 2 limited [2018], to make a determination as to the conditions that a tenant needed to comply with, in order to validly exercise a break option.

Conditional Break Clauses

Where a break clause is conditional upon compliance with conditions, any break notice served will only be effective if the pre-conditions to which the break right is subject are complied with.

The general approach of the Courts in dealing with disputes over compliance with break clause conditions is that, anything short of absolute compliance with these conditions is likely to render an otherwise valid break notice as ineffective. The law in this area has been unforgiving and even trivial instances of non-compliance can be fatal. The position was neatly summed up in the leading case of Mannai Investments Ltd –v- Eagle Start Life Assurance [1997], in which the Judge said, “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper”. 

Background

In Goldman Sachs the tenant entered into a lease of commercial premises with the landlord with a passing rent of £4 million per year. It contained a tenant’s break option on the expiry of the 20th year of the term, which states 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)”.

The tenant’s re-instatement obligations were contained in Clause 11, which required them 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 also, “to re-instate the Premises to their original layout and to no less a condition than described in the Works Specification”.

The dispute centred around whether the words “as provided in Clause 23.2”, meant that the break option was also conditional on full compliance with Clause 11, which would be onerous. Also, the use of the words “to the reasonable satisfaction of the Landlord” for example, could easily cause difficulty for the tenant if the landlord did not co-operate in the process. Of course, the landlord said that the break clause did require compliance with Clause 11 and the tenant said it did not.

Given that successfully exercising the break right would result in a saving of £20 million, combined with the ambiguity of the break conditions, it was important for the tenant to know exactly what conditions needed to be satisfied. In the circumstances, they made an application to the Court to make a determination on this point.

Decision

The Court considered that both the landlord’s and the tenant’s interpretations of the break clause may be right. Ultimately however, the Court found that the reference to clause 23.2 was simply to emphasise the requirement of vacant possession, and clause 11 went beyond the normal requirements for vacant possession. It was also noted that the drafting of Clause 11 allowed room for argument, and compliance with it was not a suitable condition to be attached to a break clause, as it would not enable either party to proceed with any certainty.

Comment

Given the characteristically stringent approach usually adopted by the Courts in these cases, this is a refreshing change of pace. Nevertheless, conditional break clauses will continue to cause problems, particularly if, as in this case, the drafting is not as clear as it could be.  It was certainly a wise choice on the part of the tenant to seek a determination from the Court on the conditions to be complied with. That said, the landlord has been granted permission to appeal, so this may not be the end of the story.

Adam Waters is a Litigation Executive in the Dispute Resolution Team at Morrisons specialising in property related disputes. Should you have any questions, please contact him by phone on 01737 854539 or by e-mail: [email protected]

 

 

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