A break clause that means what it says!

Posted: 06/11/2014

This year has been a very busy year for reported cases dealing with break clauses in commercial leases. While the high profile cases of Marks & Spencer Plc v BNP Paribas Security Services Trust Co (Jersey) Ltd [2014] and Friends Life Ltd v Seamans Hearing Instruments Ltd [2014] have both received wide coverage befitting the importance of Court of Appeal decisions, the Scottish case of Arlington Business Parks GP Ltd v Scottish & Newcastle Ltd [2014] is less well known.

The case of Arlington serves as a useful reminder of the importance of closely analysing the operation of conditional break clauses and is part of a recent trend to emphasise the importance of strict compliance with their terms. 

Commentary

Although Scottish decisions are only of persuasive authority in England, this case is an important reminder of the need for strict compliance with the terms of a break clause. Parties should not be lulled into a false sense of security by believing that such clauses will be interpreted in a "commercial" way by the courts to alleviate perceived hardship. If the words of the contract are clear, then the natural meaning of the words used will be binding. 

Clauses requiring absolute compliance with a tenant’s covenants are particularly problematic. The English courts have already decided that a breach does not have to be substantial to invalidate the operation of a clause. If a tenant wishes to operate a conditional break clause which is subject to full compliance with lease covenants, it is particularly important that they plan well ahead and recognise the full extent of the works that will be necessary to comply. In some cases of long leases coming to an end, uncertainty as to the past history of the building can make strict compliance almost impossible to achieve. 

Even an extensive repair programme may overlook items that will be discovered after the break date by a diligent landlord. Where reinstatement of alterations is required, a tenant without adequate access to proper plans can find itself in particular difficulties in knowing what to reinstate and to what layout or configuration. Again, advance planning is the only way to deal with such a scenario.

Facts

The facts of the case are relatively straightforward. Scottish & Newcastle occupied offices at 1 and 2 Broadway Park, Edinburgh under two leases made on the same terms. The leases ran to 2023 but with a tenant’s break available in May 2013. The tenants sought to exercise the break and spent over £1.3 million putting the properties into repair in advance of the break date. Nonetheless, the landlord argued that the leases had not been broken and would continue until 2023 and the equivalent of the High Court in Scotland agreed. 

In recent years, there have been many cases in which the courts have used their powers to "interpret" contracts in accordance with what they considered was the proper "commercial" interpretation of the bargain agreed by the parties. In so doing, there have been a number of examples where potential perceived injustice was avoided. However, that has, on occasion, involved doing considerable violence to the actual words of the documents signed by the parties. 

Arlington is an important reminder that these powers of interpretation are only available where there is uncertainty in the meaning of the words used in the contract. The break clause in this case required the tenants to give 12 months of their intention to break and not to be "in breach of any of their obligations [under the lease in question] at the date of service of such notice and/or the termination date". 

The first point to note is that the condition was a severe one. It was not confined to material or substantial breaches of covenant and, therefore, the tenant would fail to operate the break if there were breaches of any kind on the material dates.

However, the question for the Court was whether the lease required compliance with these terms both on the date of service of the notice and on the break date. The practical implication of the drafting was clearly of concern to the tenant. If the landlord was correct in saying that compliance on both dates was necessary to operate the break, it would require the tenant to put the property fully into repair before giving notice. While the case report does not state how longthe repair works would have taken, a budget of over £1.3 million implies very substantial works requiring many months in planning and execution. One would generally assume that works of that magnitude would require the tenant to vacate some or all of the property for significant periods while the works were carried out. While the tenant might then go back into occupation, it would again need to vacate in advance of the break date and potentially carry out further works to ensure (once again) that the property was in repair and that there were no breaches of covenant on the break date. 

Ruling

Many observers would comment that this would be an unusually harsh and uncommercial bargain for the parties to have reached. A landlord has a legitimate concern in seeing that its property is delivered up in repair so that it can re-let it. That, in fact, happened in this case but the landlord still challenged the operation of the break notices. Not surprisingly, perhaps, the Court held that there was no uncertainty in the words used:

"The natural meaning of the words used is that a notice is invalid if the tenants are in breach at the date of the notice, or the date of termination, or both."

Here, there was no argument on the facts. The tenant was clearly in breach of its obligations on the date of service of the notice. Thus, the break notices were held to be ineffective and the leases will continue until 2023.

This article was published in the Landlord and Tenant Review in October 2014.

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