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15 February 2013

HFI Farnborough LLP and others v Park Garage Group plc

Michael Fahy and Robert Hickford consider the case of HFI Farnborough LLP and others v Park Garage Group plc [2013] EWHC 6 (Ch) and highlight the importance of taking legal advice when including break clauses in contracts.

Facts

The Claimant held the freehold interest in petrol stations on four properties. It granted leases of the properties to a third party, who in turn sub-leased the properties to the Defendant for 25 years. These sub-leases contained a break clause, permitting the landlord to terminate the lease on three months’ notice.

A separate overage agreement had been entered into, which meant that if the property was sold, the defendant would receive overage payments. The overage agreement was subsequently amended by deed.

Clause 8.2 of the deed provided that the claimants were not entitled to invoke the break clauses “unless the value of the Premises on the date the Break Clause is exercised exceeds the Price”. Clause 8.3 stated the calculation of the overage payment:

Overage = (New Price – Price) – the Sale Costs x 25%.

The Claimant subsequently acquired the freehold reversions from the third party and sought to enter into another lease, which was conditional upon vacant possession, so began the process of terminating the Defendant’s lease. The Claimant served break notices, accompanied by a letter from a valuer, purporting to confirm that the value of the premises exceeded the price. The Claimant commenced proceedings for possession of the properties.

The Defendant contended that the break clause could not be invoked unless there was an agreed sale at a price exceeding the price at which the third party had acquired the property. It further contended that “the value of the Premises’ meant the freehold value of the relevant site with vacant possession and without the benefit of any licence required to operate a service station or a petrol supply contract”.

The defendant sought the rectification of the definition of sale costs as the phrase “reasonable and proper” had been deleted from the overage agreement.

Judgment

  1. The Court dismissed The Claimant’s claims for possession. It was held that it was far more likely, from a commercial point of view, that clauses 8.2 and 8.3 of the deeds were linked and that the break clause could only be exercised on a sale. The Court held that a reasonable person would have understood the parties to have meant “value of the property” to mean the new price of the property achieved by the landlord on a sale with vacant possession. The Court also held that the break clause could only be exercised if the sale price on a sale with vacant possession exceeded the price as defined in the lease.
  2. In relation to the rectification of the Deed, the Court held that although the words “reasonable and proper” may have been omitted, this did not effect the subsequent drafting of clauses 8.2 and 8.3. The words “reasonable and proper” were in the definition section of the Overage agreement, and nothing in the original emails amending the agreement mentioned removing the phrase. The Court therefore held the deed should be rectified.

Comment
 
This is yet another example of the importance of taking legal advice when including break clauses in contracts. Any ambiguity leads to an expensive battle over definitions, but more importantly, as seen here, could stop all commercial business plans involving the short-term future of the property.