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09 August 2018

150: Tenant break option not conditional on reinstatement obligation

The High Court has recently considered whether a tenant’s break option was conditional on compliance with the reinstatement obligation, as well as a requirement to yield up the premises with vacant possession on the break date.

Goldman Sachs had a commercial lease for a term of 25 years, at an annual rent of £4 million, with a tenant’s break option on the expiry of the 20th year (28 September 2020) and exercisable on at least 12 months’ and one day’s written notice.

The tenant could exercise this break ‘subject to the Tenant being able to yield up the Premises with vacant possession as provided in Clause 23.2’.

Clause 23.2 stated ‘On 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 reinstatement clause. It required the tenant at the end of the term (unless not required by the landlord) to ‘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 ‘to reinstate the Premises to their original layout and to no less a condition that described in the Works Specification’.

It was agreed between the parties that the break clause was conditional on the tenant giving vacant possession on the break date. The parties also agreed that the tenant was contractually obliged to comply with the reinstatement obligation at the end of the term, but whether this was a condition of the break was in dispute.

The landlord, Procession House, argued that the break option was conditional upon full compliance with the reinstatement clause. Goldman Sachs disagreed and sought a declaration that the break was not conditional on reinstatement. This was important given the value of the rent and the fact it had already left the premises.

The court found in favour of Goldman Sachs. Under the correct construction the break option was conditional on the tenant yielding up with vacant possession only.

The court decided that the reinstatement obligation went far beyond the usual requirements to be a condition of the break and would be a subjective test. It was difficult to know what kind of reinstatement works would be need to be carried out at the point in time that the break took effect.

This is the right decision and tenants will welcome the sensible approach taken by the court. It highlights the need for clear drafting in any break clause and a common sense analysis of what is being imposed as a condition.

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