I suggest the following changes to the documentation for @xml:space:
default: A processor should treat XML whitespace as appropriate.
preserve: A processor should preserve all XML whitespace.
Use of "preserve" is seldom appropriate in TEI documents. Whatever could be accomplished by using it is usually accomplished with less risk and more precision by using native TEI elements such as <l>, <lb>, <space> and others.
Neither XML nor TEI specify default processing for XML whitespace. Examples in TEI 5 Guidelines, however, presume that such whitespace will be normalized according to conventional rules for normalizing whitespace in mixed-content XML structures. If encoders expect applications to process whitespace otherwise, this should be noted in <encodingStmt>. Unless indicated otherwise by such a statement or by xml:space='preserve', consumers of TEI encodings should normalize XML whitespace.
For further background and recommendations, see XML Whitespace in the TEI Wiki (http://wiki.tei-c.org/index.php/XML_Whitespace) and the XML specification (http://www.w3.org/TR/REC-xml/#sec-white-space).