Tuesday, 18 October 2016

Lease Break Clauses – What Does Vacant Possession Mean?

How does a tenant satisfy a condition in a break clause that requires the giving of “vacant possession”?

This is a question that continues to occupy the courts and to confound unwary tenants.

Although the term “vacant possession” has been in use for many years, its precise meaning is open to interpretation.

Two recent cases show how important it is for tenants to take a very cautious approach to satisfying this condition, and how difficult it can be to advise a tenant on what to do.

In Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch) the High Court ruled that a tenant’s failure to remove demountable partitions, that the court determined were chattels and not fixtures, defeated the tenant’s exercise of a break right conditional on giving up vacant possession.

The partitions were held to be chattels that substantially interfered with the landlord’s possession. Expert evidence stated the partitions (with one exception) were easily removable, being fixed to the raised floor and suspended ceiling.

The court also looked at the object and purpose of the partitions and concluded that, in view of its unique configuration, they were “to benefit the tenant rather than affording a lasting improvement to the Premises”, and hence were a chattel.

Therefore, vacant possession had not been given and the break notice was ineffective.

The facts in the other case, Secretary of State for Communities and Local Government v South Essex College of Further and Higher Education [2016], were very similar. Following service of a break notice, the tenant quit the premises leaving behind internal non-structural partitions and other chattels, including a photocopier, computer screens and a reception desk. It also failed to hand back key fobs.

The tenant argued that the chattels were readily movable and did not prejudice the landlord’s ability to take possession, and that the partitions were items to be reinstated as part of a dilapidations claim.

The court ruled that the tenant had not done anything to demonstrate to the outside world that it had vacated the premises; it hadn’t communicated with the landlord; and its actions amounted to abandonment rather than yielding up the premises with vacant possession. It was in effect storing items at the premises and, as such, it was continuing to use them.

These cases once again demonstrate that, if vacant possession is a condition of a break clause, a tenant must carefully consider what must be removed well in advance of the break date.

A tenant’s advisers, both legal and surveying, must look carefully at what the tenant has installed during the term of the lease, and the provisions of any licences for alterations. It is all too easy to regard items such as partitions as fixtures to be left in situ, whereas these cases show that it is safer to remove them entirely, making good any damage caused by their removal.

It is less common nowadays to see vacant possession as condition in new break clauses and, if it appears in a first draft of a lease, it should be strongly resisted.

Instead, a tenant should only agree to a requirement to give up occupation and leave behind no continuing subleases, which is the suggestion advocated by the Commercial Lease Code (which is a voluntary code).

The Code also suggests that disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry), which would mean as part of a dilapidations claim.

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