GKN Aerospace Services Ltd v Duncan Investments Ltd [2020] EWHC 3719 (Ch); [2021] PLSCS 38 provides an interesting review of the proper considerations to be taken into account when interpreting a clumsily worded break option (the break option).
Flat 2, 16 Queen’s Gate Place, South Kensington (the flat) had originally been let for a period of one year from Duncan Investments Ltd (the landlord) by GKN Aerospace Services Ltd (the tenant) under a lease (the lease) dated 22 October 2015. The lease contained an option for the tenant to renew for a further year and a break clause. The option to renew the tenancy was exercised and the tenancy was due to end on 23 October 2017. However, by an addendum in short form the landlord and tenant agreed to renew the tenancy for the flat.
The addendum was not negotiated or drafted by lawyers. It incorporated all the terms of the lease but with a few changes, the most substantial of which was that instead of a rolling break clause, the tenant had a break option which could be exercised only at one point during the two-year term of the tenancy. It contained the break option which read: “The Parties agree that the Tenant may, for this Addendum only, serve notice at one point, being three months prior to the anniversary of the first year…”.
In addition to the break option being exercisable only at one point, the parties were agreed that there was also a second change extending the notice period from two to three months. The tenant considered that a notice under the break option would be properly served if given by the day three months before the anniversary of the first year, and it served a notice on that basis. The landlord did not accept that the tenancy had been properly determined. It contended that there had been a third change from the terms of the lease, namely that a notice under the break option had to be served on a single day exactly three months before the anniversary day.
Proceedings were issued in the county court. The matters to be considered when interpreting a contract are well known and set out in Arnold v Britton [2013] 3 EGLR 37. Importantly, the interpretation of contracts is a unitary exercise, and in Wood v Capita Insurance Services Ltd [2017] AC 1173 Lord Hodge explained that this unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated.
The county court judge considered the wording of the break option and concluded that it had only one meaning: the notice had to be served on a specific day. He found that although this requirement was unusual it could not be undermined for lacking commercial sense – there were plausible explanations for the strict wording, including that the South Kensington market is viable (such that more than three months notice is not normally required), certainty and the cynical commercial basis of a landlord wanting to restrict a tenant’s ability to exercise an option. Accordingly the judge found for the landlord, accepting that the break option had a strict meaning that there was only one day on which the notice could be served.
The tenant successfully appealed. The break option was drafted without skill and had defects. The literal meaning of a few words cannot be taken as the meaning of the break option without careful consideration of the context in which the addendum was made, the effect of its other terms and the effect of the rival interpretations. When one carried out this exercise, there was ambiguity in the meaning of the break option.
The commercial purpose of a tenant break clause is, broadly speaking, to give the tenant the right to terminate a lease easily if it no longer needs the demised property, subject to providing the landlord with reasonable notice to allow that landlord to plan and arrange its affairs accordingly and with clarity for both parties to ascertain whether the break clause is valid.
The landlord’s interpretation required that the day for service be calculated and for service to take place on that precise day. Although there were books on calculating dates for service, the deemed service provisions and the possibility of serving multiple notices, the commercial consequences of the strict requirement advocated by the landlord was to create uncertainty and risk for the tenant.
There was no true commercial purpose served by requiring notice to be given on a single day. While such a strict requirement is not unheard of, it is exceptionally rare in practice. If the parties had intended to agree to service being permissible only on a single day, they would have used much more specific language.
Elizabeth Haggerty, barrister
