The Court of Appeal recently considered the impact a dilapidations settlement agreement made on a break clause. The clause was contained in two leases drafted in materially the same terms, entered into between a landlord and tenant in respect of neighbouring premises. The tenant failed to give vacant possession on the date the leases were to determine under the break clause but the Court ruled that this did not negate the effect of the break notices.
This is the case of Legal and General Assurance Society Ltd v Expeditors International (UK) Ltd  A11 ER (D) 166 (Jan)
The Facts of the Case
- Legal and General Assurance Society Ltd were the landlord of commercial premises leased by two separate leases in favour of the tenant, Expeditors International (UK) Ltd. The two leases were granted for a term expiring in 2011 however both leases contained a break clause. Expeditors International (UK) Ltd were entitled to determine the leases on 30 December 2004, by giving no less than six months' prior notice in writing.
- The break clause in the leases had conditions attached. Firstly, Expeditors International (UK) Ltd were required to have paid all rent and "substantially performed and observed the tenant's material covenants up to the date of the expiry of the notice". Secondly, on the expiry of the notice, they were required to vacate the premises. It was expressly stated that time was of the essence.
- Expeditors International (UK) Ltd served a break notice on Legal and General Assurance Society Ltd on 12 June 2003. In response the Landlord issued a schedule of dilapidations in respect of each of the Leases. The parties subsequently negotiated the extent of liability for the dilapidations and the level of costs.
- A settlement agreement was documented in October 2004 and the schedule of dilapidations was attached. Expeditors International (UK) Ltd agreed to pay £172,000 to Legal and General Assurance Society Limited, for which they were relieved of the tenant's liabilities past and present under the lease so far as they related to the state and condition of the Premises. They also undertook to "keep the Premises in no worse a state and condition" as evidenced by the photographic schedule. This payment represented not only provision for the liability past and present under the repair covenants, but also the cost of reinstatement of alterations at the termination of the lease and an amount for six weeks' loss of rent, being the period the Landlords would require to carry out their works following termination.
- Expeditors International (UK) Ltd failed to give vacant possession of the premise on the date specified in the break clause. Legal and General Assurance Society Ltd sued for rent from the break date on the basis that the leases continued.
- The tenant argued that the settlement agreement had modified the break clause in the lease and the lease was at an end as at the break date. They conceded that their failure to vacate the premises was a breach of covenant and resulted in trespass, leaving scope for an action for damages.
The judge at first instance found in favour of Expeditors International (UK) Ltd. In his opinion there was an implied term in the settlement agreement that the parties had agreed that the leases would come to an end at the date specified in the break notices. The failure to vacate on the due date, although a breach of covenant resulting in a claim for damages for trespass, did not negate the effect of the break notices.
Legal and General Assurance Society Ltd appealed the decision but the court dismissed the appeal. The appeal decision was by a 2:1 majority. Although two of the Judges reached the same conclusion, they applied different principles in their reasoning.
- Sir Anthony Clarke - agreed with the trial judge that there was an implied term in the settlement agreement whereby the lease would come to an end as at the break date of 30 December 2004 and that remained, notwithstanding the tenant's failure to give vacant possession. The judge considered the facts in the context of all of the surrounding circumstances and concluded that the agreement between the parties was wider than the settlement agreement document. In particular, the judge regarded the wording of the introduction to the schedule of dilapidations as contributing to making business sense of the whole agreement between the parties, by the reference to "full and final settlement of…the Lease Breaks under the terms of the Leases".
- Lord Justice Sedley – also ruled in favour of the Tenant but did not approach the case from the view of implying terms in the interpretation of the settlement agreement. Rather, he looked to the meaning of the express terms. His opinion was that the intention of the parties was to document the position as to liability under the leases for repairs and alterations, in anticipation of the termination of the leases as a result of the exercise of the break clause option. Accordingly the failure to give up possession would result in an action for damages for trespass but did not operate to reverse the effect of the exercise of the break notice.
This case highlights yet again the importance of careful drafting. If a landlord wishes for particular clauses to remain in force, these should be specifically mentioned in any subsequent documentation to avoid the position that arose in this case, that the landlord is deemed to have waived its rights to them.
It should not be assumed that only those variations expressly documented will alter the terms of the lease. The dissenting judge, Lord Justice Lloyd, did not accept that the settlement agreement dealing with documenting liability for past obligations should be capable by implication of modifying future obligations under the leases (the break clause made time of the essence in relation to giving vacant possession of the premises). However, in the circumstances, as the majority decision states, the settlement agreement payment covered a combination of future and past obligations and in consequence of this, it was determined that the conditions attaching to the break clause option were no longer applicable.
In order to avoid any misinterpretation or implication in the interpretation of documents, landlords and their solicitors would be advised to stipulate the extent to which they regard the lease terms as being varied. Landlords should be made fully aware of the rights that will no longer be available to them as a result of any settlement agreement.
This case also acts as a warning to apply the principles of careful drafting to the attachments to any agreement. In this case, the surveyors' words on the schedule of dilapidations, 16 months before the agreement was entered into, that referred to full and final settlement of the break clauses, was given substantial weight in determining the intentions of the parties.