Tuesday, 13 July 2021

Lease Break Clauses: Vacant Possession Defined


The Court of Appeal* has overturned a decision of the High Court to give greater clarity on what needs to be done to satisfy a vacant possession condition in a lease break clause.

Over the years, most cases on vacant possession conditions in break clauses have tended to revolve around whether a tenant has given vacant possession if it leaves something behind, for example furniture at one end of the spectrum, or a subtenant at the other end (see this post from 2020).

This case however concerned a tenant who the landlord argued had taken too much away, and so had not given vacant possession of the “Premises” as defined in the lease.

The tenant had removed some landlord fixtures, including ceiling grids, ceiling tiles, fan coil units, ventilation duct work, radiators and other fixtures, as part of its dilapidations works before the break date.

The break option in the lease contained a pre-condition requiring the tenant to give “vacant possession of the Premises to the Landlord” on the break date. The “Premises” included “all fixtures and fittings at the Premises whenever fixed”.

Importantly, the break option was not expressed to be conditional on the tenant having observed and performed any covenants in the lease, including any repairing obligations.

The landlord argued that as the tenant had removed landlord’s fixtures it hadn’t given back the “Premises” as defined, as required by the break clause.

The High Court agreed, ruling that because the tenant had removed the landlord’s fixtures the physical condition of the premises was such that there was a substantial impediment to the landlord’s use of the premises or a substantial part of it.

On appeal, the tenant argued that the landlord hadn’t sought to rely on a substantial impediment argument, and the Court of Appeal acknowledged that the issue was instead a matter of construction – did the removal of the fixtures mean that vacant possession had not been given?

The Court of Appeal ruled in favour of the tenant, and confirmed that to satisfy a vacant possession condition, a tenant must simply ensure that the premises are returned to the landlord free of people, chattels and interests, rather than being concerned with the physical condition of the premises.

This ruling will come as a relief to tenants, and it is surely the right decision based on commercial sense and on construction of the lease terms, especially as the landlord could recover compensation from the tenant for breach of repair separately.

After all, a break clause is a fundamental term that will have been taken into account by the parties when agreeing the length of the lease term and the rent.

The Court of Appeal acknowledged that although break conditions must be complied with strictly, that doesn’t mean the condition must be construed strictly or adversely against the tenant.

Over the last few years, vacant possession conditions have become less common in new break clauses.

If such a condition appears in the initial draft of a lease, a tenant should resist it.

Instead, a tenant should only agree to a requirement to give up occupation and leave behind no continuing subleases, which is suggested in 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 (as with normal lease expiry), which would mean as part of a dilapidations claim.

* Capitol Park Leeds plc v Global Radio Services Ltd [2021] EWCA Civ 995 (5 July 2021) (Newey, Laing and Moylan LJJ)

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