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14 June 2018

Have a break, have a…….dispute with your landlord costing thousands

A commercial lease will often contain a break clause which will give the parties (most commonly the tenant) the right to terminate the lease early on service of a break notice. The exercise of break in a commercial lease is a fertile source of litigation as there is much which can go wrong with the apparently simple task of serving a break notice.

A tenant must give the break notice in exact accordance with the conditions of the break clause, so if the break clause states that the tenant must give the break notice on blue paper then a break notice given on pink paper will not suffice even though the landlord understands the tenant is asserting its right to terminate the lease. It is important therefore that a break clause is unambiguous so a tenant knows exactly what it needs to do to validly break the lease.

The recent case of Goldman Sachs International v Procession House Trustee Ltd & another (2018) decided last month highlights how an ambiguous break clause can cause problems for the parties. The clause in question required Goldman Sachs to ‘On the expiration of [the break 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 required the tenant to remove any alterations and reinstate the premises to their original layout. It was unclear from the drafting whether Goldman Sachs has to remove any alterations and reinstate the premises as a precondition of the break clause. If Goldman Sachs failed to reinstate the premises then could the landlord claim there had been a failure to comply with the preconditions of the break? This was the question the Court was asked to answer.

The High Court decided that the requirement for Goldman Sachs to reinstate the premises was not a precondition of the break. The use of brackets indicated that the reference to clause 11 was meant as a reminder of what would occur on the break date, rather then creating an obligation which Goldman Sachs had to meet on the break date to validly terminate the lease. The reasoning behind the judge’s decision was that the parties needed to have certainty over whether the break had been exercised or not.

As well as providing a timely reminder to commercial landlords and tenants to ensure that a break clause is clearly drafted, the Goldman Sachs case provides a good practical tip for commercial tenants to resolve issues with exercising a break clause well in advance of the break date. The break date was not due until 2019, but the implications for Goldman Sachs of not validly breaking the lease were high. The lease attracted a rent of £4m per year and the lease would, if not terminated under the break clause, continue for another 5 years. Instead of serving the break notice and then litigating after the break date should the landlord deny the break has been validly exercised, Goldman Sachs instead sought an earlier declaration from the Court on what it needed to do to exercise its right to terminate the lease under the break clause. Commercial tenants should start thinking about exercising a break clause well in advance of the date a break notice is due to be served. If there is any ambiguity in the drafting of the break clause and should the tenant fail to seek advice until a few weeks before the date on which the break notice is due to be served, then there is unlikely to be sufficient time for the tenant to get a declaration from the Court ahead of the break date. The tenant would then have to take its chances in expensive litigation against the landlord and if the Court finds against the tenant then the tenant is lumbered with the lease continuing and an order to pay the landlord’s costs.

If you are commercial tenant seeking to exercise a break right, then it is crucial to seek early legal advice (we suggest you diarise at least 2 years before the break date) to ensure that you do not slip up on the many traps which can be sprung on the unwary in validly exercising the right to break a lease.

 

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