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Stand and Deliver – Actual sale of freehold required for landlord to operate break clause linked to overage payment

HFI Farnborough LLP and others v Park Garage Group plc [2012] EWHC 3577 (Ch)

HFI was the landlord of four petrol stations and Park was the tenant.  The leases contained a break clause permitting the landlord to terminate on three months’ notice. However, in each case there was a separate overage agreement which placed restrictions on the power to exercise the break clause and made provision for overage payments to Park in the event of a sale of the property by the landlord. In July 2008 the overage agreements were replaced with deeds of variation. The effect of the variations was to add a provision to the leases which meant that the break clauses could not be exercised “unless the value of the Premises on the date the Break Clause is exercised exceeds the Price”. The “Price” was the price for which the premises had been purchased by HFI. If HFI exercised the break options, it would have to pay overage to Park within 7 days of completion of the sale.

HFI purported to serve break notices to determine the leases on 16 July 2012. The notices were accompanied by a letter from a valuer stating that the value of the premises exceeded the Price.  HFI denied that it was obliged to sell the properties to operate the break clauses and it subsequently emerged that HFI was planning to grant new leases to a third party. Park objected to the break notices arguing that the intention of the parties was that break notices would only be served in the context of a sale by HFI, in which case Park would receive its overage. Park argued that the leases should be construed so as to make the exercise of the break options conditional upon a sale or, alternatively, that they should be rectified to achieve this.

The Court agreed with Park. The intention of the parties from the admissible background facts was that the break options and the overage provisions were part of the same bargain. There was no commercial reason why Park should have agreed to the addition of the break rights in the leases if it did not benefit from the overage provisions and similarly, no reason why the break would be conditional upon the value of the premises exceeding the Price. The only logical reason for this condition was to ensure that Park would benefit from the overage provisions, which must have anticipated a sale of the premises. Even if this was wrong on construction, the judge found that he would have ordered rectification of the leases on the basis that it was the common continuing intention of the parties that the exercise of the break options would be conditional upon a sale of the premises.