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Tenant laughing all the way to the bank

Goldman Sachs International v Procession House Trustee Ltd [2018]

The case of Goldman Sachs International v Procession House Trustee Ltd [2018] is the latest in a long line of court decisions which show the difficulties that parties can have in correctly interpreting and exercising a break option in a lease.

Background

The tenant, Goldman Sachs International, occupied office premises under a 25-year lease at a rent of over £4 million a year. The lease contained a break option exercisable by the tenant after 20 years, subject to there being no arrears, and “subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2.”

Clause 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 was the yielding-up provision which stated that, “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.”

The facts

The tenant wanted to exercise the break option. It accepted the obligation to give vacant possession as a condition of the break option but applied to the High Court for a declaration that there was not an additional condition to comply with the requirements of clause 11. The tenant argued that clause 23.2 merely acted as a reminder of what would happen when the break right was exercised and that clause 11 contained a separate contractual obligation that was not related to the break option.

The landlord argued that the tenant must comply with the yielding-up provisions in clause 11, which meant reinstating the premises to their original layout as a condition of exercising the break right. The landlord argued that the tenant’s construction made the words “as provided in clause 23.2” in clause 23.1 and all the words in clause 23.2 redundant. 

The decision

The High Court held that the reference in clause 23 to the requirements in clause 11 did not make the break right conditional upon the reinstatement of the premises. As long as there were no arrears and vacant possession was given, the break option would be validly exercised. The Court agreed with the tenant’s position that the reference to clause 11 in clause 23.2 confirmed the tenant’s obligations if the lease ended under the break option. The court was influenced by the clause 11 reference being in brackets. 

Practical points

This tenant-friendly decision was far from clear cut, and is a useful reminder that the parties to a lease must ensure that any conditions to a break option are clearly drafted. It is essential that both parties know what must be done for the break option to be successfully exercised without the delay and expense of having to ask a Judge to decide what was meant. 

In this case, if clause 11 had been part of the break conditions, it would be have been very hard for the tenant to satisfy the condition, given the requirement for work to be done “to the reasonable satisfaction of the landlord”.

The landlord was granted permission to appeal to the Court of Appeal so it remains to be seen whether the Court of Appeal will take a more landlord-friendly approach, if any appeal proceeds. 


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Summer 2018

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Danny Revitt