Act: Connal QC; Pinsent Masons LLP

Alt: J D Campbell QC; DAC Beachcroft Scotland LLP

16 January 2013

Introduction
[1] RPS RE II A LLP owns ground floor premises at Almondview Office Park in Livingston, West Lothian. In 2008 the subjects were let to CBS Outdoor Limited for a period of eight years. Clause 8.16 of the lease contains a break provision. It grants the tenant an option to terminate the lease at the half-way point:

"The Tenant shall have the option to terminate this Lease with effect from 21 April, Two Thousand and Twelve (such date being hereinafter referred to as the 'Termination Date'). In order to exercise such option to terminate this Lease the Tenant shall require to give the Landlord at least nine months written notice prior to the Termination Date of its intention to exercise the said option to terminate this Lease (time being of the essence) and any such termination shall be without prejudice to any right of action or remedy or any claim of the Landlord against the Tenant for any antecedent breach of the Lease and in the event of the said CBS Outdoor Limited wishing to terminate the Lease as aforesaid the said CBS Outdoor Limited shall require to pay on or prior to the Termination Date, and any such option to terminate is wholly and essentially subject to the said CBS Outdoor Limited paying to the Landlord the sum equivalent to a payment of four months rent in terms of this Lease (exclusive of Value Added Tax) said sum to be in addition to all other sums and obligations due by the said CBS Outdoor Limited in terms of this Lease up to the Termination Date and the said * (exclusive of Value Added Tax) is to be paid in full on or prior to the Termination Date."

I have placed an asterisk at the point where a word or words is missing from the clause.

[2] By letter dated 28 March 2011, the tenant's solicitors wrote to the landlord as follows:

"we hereby give you notice that in accordance with the terms of Clause 8.16 of the Lease the Tenant is exercising its option to terminate the Lease with effect from 21 April 2012 and accordingly shall vacate the premises on or before that date."

Subsequently, the tenant paid a lump sum equivalent to four months' rent to the landlord. Those funds are currently held in a suspense account.

[3] Clause 4.4 of the lease imposes various repairing obligations on the tenant. It must keep the subjects "in good substantial and tenantable repair". That includes a duty to "carry out such repair, rebuilding, renewal, reinstatement or replacement works upon the whole or any part of the Premises as are in the opinion of the Landlord required from time to time."

[4] In early February 2012, the landlord instructed an inspection of the subjects to be carried out. On 27 February 2012, the landlord issued a schedule of dilapidations to the tenant, based upon the inspection report. The tenant did not instruct any repairs, nor did it pay the landlord to carry them out. It appears that parties tried to negotiate a settlement in relation to the dilapidations schedule up to the proposed termination date of 21 April 2012.

[5] Those negotiations did not ripen into settlement. By letter dated 3 May 2012, the landlord's solicitors intimated to the tenant that it considered the purported exercise of the option to be invalid. In particular it had not complied with its obligations in terms of clause 8.16. Accordingly, the landlord regarded the lease as continuing in full force and effect.

The Pleadings
[6] In the present action, the landlord concludes for declarator that the tenant has not validly terminated the lease. It also seeks payment of the costs of repair, which it estimates to be £28,072.62, together with associated professional fees of £900 and interest of £56.82.

[7] The tenant takes the contrary position, but the defences make it plain that the factual matrix is largely agreed. Answer 7 states:

"Admitted a schedule of dilapidations was issued to the defenders on the 27 February 2012 following on from an inspection on 8 February 2012. Admitted the estimated cost of repairs (in the dilapidations schedule) was £28,072.62. Admitted the defenders have failed to complete repairs. Quoad ultra denied. The schedule of dilapidations was the subject of negotiation up to and beyond the Termination Date. The defender admits that the property has been returned to the pursuers in breach of their repairing obligations in terms of clause 4.4 of the lease and that certain sums are due under explanation that the sums sought are excessive."

[8] The parties agree that the tenant has satisfied two of the conditions stipulated in clause 8.16. The dispute relates to the final part of the clause. The tenant contests the landlord's assertion that it stipulates a further requirement.

Submissions
[9] The tenant seeks dismissal of the action. Mr Campbell began by arguing that "said" in clause 8.16 referred to the lump sum payment. As the discussion progressed, however, he departed from that initial approach. Instead he maintained that it is not possible to construe the clause in a manner which accords with commercial common sense. Accordingly, the words are meaningless and fall to be treated pro non scripto. In consequence, the Tenant validly exercised the option to terminate, because it has satisfied the two conditions laid down.

[10] Mr Connal submitted that clause 8.16 is capable of three possible constructions. Prior to the termination date, the tenant has to (a) pay and perform all its obligations in full; or (b) pay all its monetary obligations; or (c) pay all sums over and above the lump sum. He suggested that each interpretation was consistent with commercial common sense.

Contractual Interpretation
General Principles
[11] In Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (SC) 53, Lord Hope of Craighead (DPSC) stated at para 11:

"The court's task is to ascertain the intention of the parties by examining the words they used and giving them their ordinary meaning in their contractual context. It must start with what it is given by the parties themselves when it is conducting this exercise. Effect is to be given to every word, so far as possible, in the order in which they appear in the clause in question. Words should not be added which are not there, and words which are there should not be changed, taken out or moved from the place in the clause where they have been put by the parties. It may be necessary to do some of these things at a later stage to make sense of the language. But this should not be done until it has become clear that the language the parties actually used creates an ambiguity which cannot be solved otherwise."

Lord Clarke of Stone-cum-Ebony stated at para 45:

"The true construction ... depends upon the language of the clause construed in the context of the lease as a whole, which must in turn be considered having regard to its surrounding circumstances or factual matrix."

[12] Multi-Link is one of a series of cases in which Lord Clarke has discussed the correct approach to contractual construction. In Rainy Sky SA v Kookmin [2011] 1 WLR 2900 delivering the judgment of the Supreme Court, he stated at para 14 that:

"the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant.

Such a person:

"is one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

[13] The court must assess whether the clause has a natural meaning. If not it should go on to consider the implications of each interpretation and consider the consequences of each construction (at para 26). It is "generally appropriate to adopt the interpretation which is most consistent with business common sense" (at para 30). In Aberdeen City Council v Stewart Milne Group Ltd 2012 SLT 205 at para 28, Lord Clarke provided the following succinct guidance:

"the ultimate aim in construing a contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant; the relevant reasonable person being one who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract."

Lord Hodge recently followed that approach in Soccer Savings (Scotland) Limited v Scottish Building Society [2012] CSOH 104.

Break Provisions
[14] As well as the general principles, it is also necessary to consider the construction of break provisions in leases. Under English law, the analysis of such clauses has a lengthy history. The correct approach is now settled: Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch. 493. In that case Nicholls LJ stated at p 528E-F:

"although each lease falls to be construed having regard to its own particular language and terms, the degree of similarity of language in break clauses and renewal clauses in common use is sufficiently marked in crucial respects for it to be possible and sensible to consider the matter, initially, in fairly general terms."

[15] Bingham LJ at pp 537G-538A was to similar effect:

"But an option of the present kind has little to do with the ordinary relationship of landlord and tenant, and if the matter were free from authority I should see very great force in the argument that the effect of this option should be determined on ordinary contractual principles. Unfortunately for the plaintiffs, however, questions closely related to the present have been intermittently litigated for 200 years and the current of authority has been against the plaintiffs' contention."

[16] He explained the underlying rationale as follows (at p 538A-C):

"Where a tenant wished to take advantage of a break clause, the landlord was not greatly concerned with the history of the tenant's performance before the break. The worse the tenant's performance, the readier the landlord might reasonably be to get rid of him. But whatever the tenant's defaults in the past, the landlord would be very much concerned that at the time of the break the rent should be fully paid ... and the covenants fully observed (so that the property could be re‑let or sold without delay or additional expenditure)."

[17] Kerr LJ listed nine propositions that he derived from the authorities: pp 518B-520G. He began by stating :

"The first question is whether, on a true construction of the proviso in question, the absence of any material breaches of covenant by the defendant is a condition precedent to the exercise of the option, as well as the giving of the requisite notice purporting to exercise the option."

[18] The crucial question in that case was whether it applied to spent as well as subsisting breaches of contract. Kerr LJ continued in the second proposition by outlining the difficulties of construing a clause to apply to spent breaches:

"First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent, then the option would in practice be worthless or merely at the mercy of the landlord. Therefore the parties cannot have intended that the absence of spent breaches should be a condition precedent. Secondly, however, it is natural and sensible that the landlord should require the tenant not to be in breach of any covenant on the operative date and that all outstanding claims for breach of covenant should have been previously satisfied, so that the lease is then effectively clear. The proviso is therefore to be construed as intended to apply to subsisting breaches, with the result that the relevant condition precedent is the absence of any subsisting breach."

[19] The First Division considered the position in Scots law in Trygort (No. 2) Ltd v UK Home Finance Ltd 2008 SC 100. That case arose out of similar facts to the present case. The landlord disputed the validity of a break notice, on the basis that certain payments had not been made in breach of the lease. But it was accepted that there were no outstanding breaches at the time that the break notice was issued. The court derived "much assistance" from the line of authority in England (at para 10). It held that "the strong commercial reasons" which justified the decision in Bass Holdings Ltd are "just as relevant to the consideration of a commercial lease in this jurisdiction" (at para 11).

Discussion
[20] I begin by enquiring whether clause 8.16 has a natural meaning. In my view the answer is in the negative. Normally, "said" is used as a form of legal shorthand. It tells the reader that the word or words immediately following are exactly the same as something which has been mentioned earlier in the document. In this case, clause 8.16 supplies two candidates to fill the vacancy: (a) "the sum equivalent to a payment of four months rent in terms of this Lease", and (b) "all other sums and obligations".

[21] Has one or other of these phrases been omitted by mistake? There are problems of semantics and syntax with the insertion of either of them. The difficulty with (a) is that the clause would then be tautological. It would repeat the requirement that the tenant must pay the lump sum. It would also deprive of content the words "in addition to all other sums and obligations" (my emphasis). With regard to (b), the phrase cannot easily be linked to the words that follow: "is to be paid in full". There is the obvious difficulty of linking a plural noun to a singular verb. Further, repair obligations do not always translate into money. No mention is made of performance, which would be natural if the wording encompassed obligations.

[22] For these reasons, I conclude that it is not possible to find a natural meaning. But that is not the end of the matter. I must consider what a reasonable person would have understood the words to mean. Would he or she have inferred that a further requirement was imposed on the tenant? In doing so, I recognise the force of Lord Rodger's observation in Multi‑Link at para 27 that "something has gone wrong with the drafting of the relevant clause ... So no construction is ever going to produce perfect harmony among all its elements."

[23] One issue must be addressed at the outset. Would a reasonable person have known of the line of authority in England leading up to Bass. In other words, would he or she be aware of the proper construction of break provisions? In Trygort the court expressly rejected the argument that such knowledge formed part of the factual matrix surrounding the agreement of the lease: para 11. As there are no pleadings in the present action to support such an approach, I begin on the same footing. That means that the words are paramount.

[24] I believe that the phrase "in addition" would lead a reasonable person to anticipate that a further requirement was going to be imposed on the tenant. But as they read on, they would face a conundrum. What precisely was that further duty? Each of the constructions suggested by Mr Connal emphasises the "clean break" approach. He argued that there should be no subsisting breach at the time of termination and that was consistent with commercial common sense. Perhaps that is what the landlord intended. But it is not clear to me that it is what the tenant intended or that any of those meanings could be wrought from the clause by a reasonable person. Indeed the fact that three interpretations can be proffered tends in my view to suggest that there is no clear construction.

[25] There are two further factors. First, disputes over dilapidation schedules are common. On Mr Connal's approach if one had been issued shortly before the break date, that would have prevented the termination taking effect. Secondly, the right of the landlord to recover in respect of antecedent breaches of the lease is expressly reserved in the earlier part of clause 8.16.

Conclusion
[26] Having regard to these considerations, I therefore hold that it is not possible to arrive at a construction which imposes a third obligation on the tenant which is a condition precedent to termination at the break date.

[27] Accordingly I shall sustain the tenant's first plea in law in the defences so far as it relates to the declarator sought by the landlord in terms of the first conclusion. I shall put the case out by order to discuss further procedure in respect of the other conclusions for payment.