Tenant’s Break Clause

March 13, 2019

In May 2018 the High Court in England considered which tenant obligations at a break date were pre-conditions required to exercise a break right validly, and which obligations amounted to responsibilities for the tenant to comply with as a consequence of their exercise of the break. Surprisingly the courts found in favour of the tenant wishing to exercise the said break as the landlord was wrongly trying to rely on a perceived failure to satisfy a “pre-condition” that was not actually required to exercise the breach.

Goldman Sachs International v Procession House Trustee Ltd

The landlord in the above mentioned case granted a lease for a term of 25 years, at a rent of over £4 million per annum with a tenant break right after 20 years. The break clause contained the usual pre-conditions for the tenant to comply with: that vacant possession be given and all rents owed be paid up. However, there was a further sub-clause requiring the tenant to deliver up the premises in accordance with the “yield up” provisions in the lease – such provisions required the removal of tenant alterations and or additions from the premises.

The tenant sought a declaration from the Court that the pre-conditions of vacant possession and there being no rent arrears were the only requirements for a valid exercise of their break right. The Court found in their favour by applying the legal principle contra proferentem, i.e. “interpretation against the draftsman”. This meant, that due to the severe implications for the tenant (by not being able to exercise this break right for failing to comply with all pre-conditions) it was the responsibility of the landlord (or their solicitors) in drafting the lease to set out clearly how the terms of the lease are to be applied, especially important clauses such as the break clause. The requirement to yield up was contained in an entirely separate clause of the lease to the break clause. It was deemed that the requirement to yield up the premises was a consequential obligation after serving notice to quit (or break) and not actually a pre-condition to exercising this break right.
This is one of the very few cases where the Courts have taken a “tenant-friendly” approach when interpreting a tenant break right. The landlord was, however, granted permission to appeal the decision, so “watch this space” for any further interpretation or comments arising from further findings of the Court.

What does this mean for you as a tenant or landlord?

This decision reminds landlords and tenants alike that leases need to be drafted in a clear and unambiguous way specifying any pre-conditions attached to the break clauses contained therein.

Tenants will want an unconditional break and this is something often negotiated at the outset between the parties. On the other hand the landlord will want to ensure all monies owed to them are paid up and that they can have empty premises back at the expiry of the term of the lease.
If a landlord wants a tenant to satisfy certain pre-conditions prior to exercising their right to break, the relevant provisions must be worded in the language of conditionality. In Goldman Sachs International v Procession House Trustee Ltd the yield up requirement relating to the break was worded in such a way that it merely reminded the parties of what would happen if and when the right to break was exercised, rather than being a pre-condition to permit the exercise of a break right.
The case illustrates how tenants, in doubt over what pre-conditions must be satisfied to exercise a break right, should consider seeking clarity well before the actual break date to prevent litigation at a later date. However this could all be avoided by clear drafting in the lease in the first instance!

Please note that Goldman Sachs International v Procession House Trustee Ltd was a case heard in England but any significant case law in England or Wales has substantial influence over the decisions of courts in Northern Ireland.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.

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