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I want to break free

Napthens - July 6th 2018

Goldman Sachs International v Procession House Trustee Limited, Procession House Trustee 2 Limited

This case came before the High Court in May. The Tenant (Goldman Sachs) asked the Court to determine the meaning of a break clause in its lease of Procession House, 55 Ludgate Hill and 110 New Bridge Street in the City of London (a building which surrounds the City Thameslink railway station).

The lease was dated 17 April 2000 and was for a term of 25 years from and including 29 September 1999 (so would expire in September 2024) at an annual rent of over £4 million. There was a Tenant’s break clause at clause 23 which stated:

“23.1 subject to the Tenant being able to yield up the 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 day’s 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) but 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 was headed “YIELDING UP” and 11.1 stated: “Unless not required by the landlord, the tenant shall at the end of the term, 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 shall reinstate the premises to their original layout and to no less a condition than as described in the Works Specification.”

Clause 11.2 provided that the Tenant would yield up the premises in accordance with the Works Schedule, subject to some further detailed provisions.

The tenant wanted to exercise the break clause  but the question was:  did it only have to comply with the conditions in clause 23 (vacant possession and payment of rent) or did it also have to comply with clause 11 ( the reinstatement obligations)?

Because this question was worth £20 million in rent to them if they got it wrong, Goldman Sachs applied to the High Court (well in advance of the September 2018 deadline for serving its break notice) to determine the meaning of the break clause conditions.

Goldman Sachs argued that clauses 23.1 and 23.2 only referred to clause 11 to remind the parties what the Tenant had to do at the end of the lease when giving vacant possession - and the lease did not make these steps conditions of the break clause. The Landlord contended that compliance with clause 11 was a condition of the break clause.

Got to be sure when you walk out that door…

This is another case which demonstrates the importance of clear drafting. If the clauses had been clearer it is highly unlikely the case would ever have gone to Court.

Applying the contra proferentem rule (where the meaning of a provision in a written contract is unclear, it is interpreted against the party who drafted it - in this case the Landlord) and given the very serious implications for the tenant of a failure to comply with the conditions of the break clause, it was incumbent on the landlord to precisely define what the tenant had to do to comply. If it wanted strict compliance with clause 11 as a condition of the break clause, it should have said so. Putting the reference to clause 11 in clause 23.1 in brackets suggested this was only a reminder of what Goldman Sachs needed to do at lease end - rather than imposing a fresh condition on the exercise of the break.

Also, what was required of the tenant under clause 11 allowed too much room for debate e.g. the terms “to the reasonable satisfaction of the landlord” and “materials of comparable quality” (plus reference to a 14-page Works Specification which was not written in order to precisely specify what the tenant had to do). Due to its unclear terms, complying with clause 11 was not a suitable precondition for the break clause. Even a trivial breach of it could mean that the tenant was unable to exercise it and end the lease.

So, what can we learn?

The lesson from this case echoes earlier decisions about the importance of clear lease drafting, particularly around tenant’s break clauses. The case could have gone either way -and in fact the Landlord has been given permission to appeal.

The case is also a useful reminder that where parties are in disagreement upon the meaning of a contract (including a lease) they can ask a Court for a “declaration” as to their rights to help them decide what course of action to take.

If you need help with drafting agreements, or queries/disputes regarding  commercial lets, our team of lawyers are on hand to help, just get in touch.