'Business common sense' considered in dispute over break conditions

The Court of Appeal recently dismissed an appeal against a decision that exercise of the break was not conditional on compliance with a provision requiring the tenant to 'yield up' the premises by reinstating them to their original layout. The decision was handed down by the High Court in May.

"Having sought clarity from the Court of Appeal, we understand that the appeal was dismissed without a hearing, suggesting that the parties came to a negotiated settlement," said property disputes expert Alicia Foo of Pinsent Masons, the law firm behind Out-Law.com.

"As a result, the law is as set out in the judgment given by the High Court. This will be welcomed by tenants as, following the decision in Arnold v Britton, the recent trend in cases concerning contractual interpretation has been for the courts to adopt a literal approach irrespective of whether this results in a bad bargain," she said.

"This case demonstrates that, whilst the court's primary consideration will be the natural and ordinary meaning of the language used, in cases where there are two rival and, ostensibly, reasonable interpretations, in deciding which one to apply the court can give weight to which interpretation is more consistent with common sense and the effect of applying the 'contra proferentem' principle which, in this case, required the ambiguous provision to be construed against the landlord," she said.

The tenant, Goldman Sachs International, entered into a 25-year lease with landlord Procession House Trustee from 29 September 1999. The lease contained a break clause, exercisable after 20 years, provided that the tenant had no rent arrears and "subject to the tenant being able to yield up the premises with vacant possession as provided by clause 23.2". Clauses 23.2 stated that "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)".

Clause 11 set out the tenant's 'yielding up' obligations. These included a requirement on the tenant to "remove any alternations 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", unless not required by the landlord.

The landlord and tenant disagreed over exactly what was required of the tenant in order to successfully execute the break clause. Both agreed that the clause set out two conditions: that there were no rent arrears; and that the tenant should yield up with vacant possession. There was, however, disagreement over whether the yield up obligations must be complied with before the break clause could be executed, or whether the wording of clause 23.2 was intended as merely a reminder to the parties of their obligations once the break had been executed successfully.

In his High Court judgment, Mr Justice Nugee agreed that "both constructions are possible as a matter of language". However, after some consideration, he agreed with the tenant that "the natural and ordinary meaning of the phraseology found in [the break clause] is to read it as imposing a single condition, that is an obligation to yield up and to yield up in a certain way, and that way is with vacant possession as provided in clause 23.2, rather than to read it as importing effectively two separate conditions, this is to yield up the premises with vacant possession and to yield up the premises in accordance with clause 11".

"If [the landlord's] construction had been intended, there are a number of other ways to do it which would have been, to my mind, a much more natural way of expressing the concept which he says is intended rather than the rather awkward way in which it has been done," he said.

The judge also noted that the break clause had been drafted in "the traditional style", "indicat[ing] in the clause both what is needed to exercise the clause and what the consequences of the exercise of the clause will be".

"That is what is done here by clause 23.1 and clause 23.2, clause 23.1 telling you what you need to do in order to exercise the break, which is to give notice and importing the condition (whatever it means), and clause 23.2 then explaining what the consequence is of giving the notice, namely to bring the term to an end," he said.

The judge went on to consider which construction was more consistent with business common sense.

"It is perfectly true that the sort of (and it may be this is unavoidable) slightly vague obligations which are found in clause 11 with words such as 'comparable quality', 'readily available', 'reasonable opinion of the landlord', and 'reasonable satisfaction of the landlord', where there is likely to be room for dispute in any particular case whether the obligations have been complied with or not, are not very suitable to have as a precondition to the valid exercise of a break notice," he said.

"[T]he one thing which does make commercial sense for both landlord and tenant is to know without much difficulty whether a break clause has been validly exercised or not because the tenant will want to know whether it really has to leave and has no further liability for rent, and the landlord will want to know whether it will get the premises back and have to re-let them," he said.

"The practical effect of [vague obligations] is that there is a certain amount of tolerance in the nature of an obligation like clause 11 so that no sensible landlord looking after their own commercial interests will pursue the question of a breach of clause 11 unless it has significant material consequences. However, if instead the prize for the landlord of establishing even a minor breach of clause 11 is not a claim for nominal or very small damages but is the ability to claim another £20 million in rent, the landlord will have a much greater incentive to pursue even very small divergences (or alleged divergences) from the strict letter of the tenant’s obligation in clause 11," he said.

"That, of course, is a regime that the parties can agree to, if they wish, and what a landlord might well wish to have for the reasons [its lawyer] put forward, but it does not seem to me to be the most commercially sensible place to leave the parties’ obligations. In so far therefore as the commercial good sense of the competing constructions is to be given any weight at all, for the reasons I have sought to give, I prefer [the tenant's] construction on this point as well," he said.

It was also relevant that the drafting favoured by the landlord left a considerable amount of room for argument and potential disputes. The judge considered this in the context of the 'contra proferentem' legal principle, in which an ambiguous contractual term is interpreted against the interests of the party that seeks to rely on it.

"The nature of a break clause is that it is, although contained in a bilateral contract, something which can be exercised unilaterally. It is often, as this case illustrates, of great importance to the parties seeking to exercise it and it does seem to me that it is appropriate that if the landlord wishes to impose a precondition on the tenant, he should make it quite clear in the drafting of the clause what it is that the tenant has to do rather than leave it to be argued out at the stage at which it may be too late to do anything about it, with the prize for the landlord being the potential ability to defeat the clause," he said.