Goldman Sachs International –v- Procession House Trustee Limited, Procession House Trustee 2 Limited [2018] EWHC 1523 (CH)

Introduction

The service of a break notice is often a contentious point in a landlord and tenant relationship.
Break clauses are strictly interpreted and it can be notoriously difficult to serve a break notice correctly. Even a minor breach can invalidate a break notice. Tenants and practitioners alike will remember Avocet Industrial Estates LLP -v- Merol Limited [2011] EWHC 3422 (CH) in which the tenant was found to have not broken its lease on the basis that it had £130 of historic interest which had accrued on late payments, despite the fact that it had not been demanded by the landlord.
The message is, and always has been, exercise an abundance of caution when exercising a break.

The Facts

In this case, Goldman Sachs had a lease of office premises at Procession House in the city of London. The lease was for a term of 25 years from and including 29 September 1999, with a break at the 20th year of the term. The passing rent was £4 million. If therefore Goldman Sachs could exercise the break, it could save itself £20 million. A hefty saving, not least because Goldman Sachs was no longer in occupation of the building.

The parties could not, however, agree on the interpretation of the break clause and so GS very sensibly applied to the Court for a declaration as to the true meaning of the break before exercising the same.
The key text of the break read as follows:

“23.1 Subject to the Tenant being able to yield up Premises with vacant possession as provided in clause 23.2, this Lease shall be terminable by the Tenant at the expiry of the twentieth year of the Term by the Tenant giving to the Landlord not less than 12 months’ and one days’ previous notice in writing.
23.2 On the 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). Such determination shall be without prejudice to the respective rights of either party against the other in respect of any antecedent claim or breach of covenant.

23.3 The Tenant shall not be entitled to give such notice while it shall be in arrears in payment of the Rent.”

Clause 11, to which paragraph 23.2 referred, was a reinstatement clause requiring the tenant to remove alterations and additions, make good and reinstate the premises.

The parties had agreed that there were two conditions to the break clause. The first was that the tenant could not give notice whilst it was in arrears of rent. The second was that it should give vacant possession of the property at the break date.

The parties, however, disagreed on the interpretation of 23.2 and whether that imposed a further condition such that the tenant was obliged to comply with the reinstatement obligations contained within clause 11.

The Decision

The tenant successfully argued that natural and ordinary meaning of clause 23.2 was that it did not impose an additional condition on the tenant. Rather, it offered additional clarification. Arguably, the words within the brackets in 23.2 were largely redundant and the Court drew the conclusion that these had been added for emphasis.

The Court also took into account that the yielding up clause included a degree of ambiguity such that the tenant would require the landlord’s input on compliance. Minor breaches could invalidate the break. In considering this point the Court applied the contra proferentum rule which means that if there is doubt about meaning, the clause should be construed against the drafter, in this case the landlord.
The Court noted that if the landlord wished to impose a pre-condition, he should make it clear in the drafting what the tenant has to do, rather than leaving it as a point to be argued.

The message remains clear; break clauses should be considered carefully at drafting stage in order to ensure that both parties can be sure as to the requirements that need to be fulfilled in order to exercise a break. If in doubt, the parties should engage, and well in advance of the break date, in order to agree interpretation of the same.

The case is now the subject of an appeal, the outcome of which is awaited with interest.

For queries please contact:

Gemma Staples, Director
Tel: 0161 393 9075
Mob: 0782 552 8094
Email: gemma.staples@pannonecorporate-com.stackstaging.com