The decision in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363; [2007] PLSCS 87 highlights the attention to detail required when negotiating and drafting break clauses. Even greater care is required if a transaction is restructured so as to avoid errors that will render break clauses inoperable.
The parties disagreed about the effect of a defective break clause. The landlord argued that the lease: (i) gave the tenant three separate opportunities to terminate the tenancy; or (ii) should be rectified to reflect the parties’ agreement to this effect. However, the tenant argued that it had the benefit of five separate rights to terminate the lease.
The Court of Appeal rejected the case for rectification of the lease, but decided that there was clearly a mistake on the face of the document, which the court could correct as part of the process of interpreting the lease. The court used the agreement for lease as an aid to construction. The form of lease attached to that agreement had left the court in no doubt about the nature of the words that were missing, and the court consequently concluded that the lease should be interpreted as offering the tenant three opportunities (dependent on a prior rent review) to terminate the tenancy.
The commercial consequences for the tenant are grave. The rent payable under the lease is significantly above the market rent and because the landlord can sidestep the tenant’s break clauses by deferring rent reviews to avoid the break dates in the lease, the tenant will now remain liable under the lease until its expiry in 2029.
The 2007 Code for Leasing Business Premises states that leases should allow both landlords and tenants to start the rent review process. Drafting such as this will assist tenants with the benefit of break clauses that are tied to the operation of rent reviews, as well. Those with the benefit of upward/downward rent review provisions in their leases.
Another practical lesson can be learnt from this case. The Court of Appeal was surprised that no one had paid sufficient attention to the break clause to work out precisely what it had meant. It was even more surprised that the deficiencies in the clause were overlooked when the parties agreed to restructure the transaction, since this necessitated altering the dates in the break clause. However, it may be relevant to note that the lease was drawn up in the traditional style that permeated legal documents at the time. The break clause was convoluted and lengthy, and this may have contributed to the errors in transposing and checking the amendments to the lease.
Documents that are written in plain English are generally written in digestible chunks, which are easier to understand. Plain English is more precise and highlights any ambiguities and uncertainties that traditional writing tends to hide. A move towards documents such as this would assist practitioners, clients and the courts.
Allyson Colby is a Property Law Consultant
