Exercising a contractual break right is one way to achieve an early exit from a commercial lease. In the current climate, both landlords and tenants are attempting to reach mutually beneficial solutions, but it is inevitable that, in some cases, the only option will be to exercise a break right.
Break clauses in commercial leases are often conditional on certain steps being taken in order for the lease to end early, including sometimes an obligation to return the property with vacant possession. These conditions are strictly enforced. Case law over the years has provided some clarity but the latest of these, Capitol Park Leeds PLC v Global Radio Services Limited , shows that it can still be very hard to get it right.
The typical break clause
Break clauses vary greatly, and those wishing to exercise them should consider the specific terms of the lease in each case. Typically, notice must be given in writing and often three or six months before a fixed break date or dates. A separate clause may provide for notices to be served by a particular method and at a particular address. Care must be taken to ensure all of these provisions are complied with.
Most landlord break clauses, and some tenant break clauses, are unconditional, although a section 25 notice may also be required if the lease is not excluded from the Landlord & Tenant Act 1954. Serving a valid notice is all that is required. But many tenant break clauses will require the tenant to take certain steps, such as paying rent and other sums due under the lease, leaving the property in a particular condition, and vacating the property for the notice to be effective.
It is this condition to vacate the property that we are particularly concerned with here, because it is the one that generates the most uncertainty and therefore the most litigation. Vacating a property might seem straightforward, but many questions can arise, especially where the obligation is to deliver up 'vacant possession'. Previously, one could be forgiven for thinking that means removing one's possessions and personnel from the property and returning the keys. But what if the tenant is carrying out work to the property, for example repairing works or after service of a schedule of dilapidations? What if the tenant has made alterations to the property? What if the tenant has (with all good Intentions) left a security guard to protect the property or a contractor to finish snagging work?
Vacant possession – attempting a definition
Academically, it is generally accepted that vacant possession requires the land/property to be free of any "impediments" that will substantially prevent the owner from obtaining the quality of possession for which he had contracted. These impediments might be physical or less tangible, for example where sub-tenants or licensees have continuing rights over the property.
In Legal & General v Expeditors Lewison J (as he then was) stated that if the person required to give up vacant possession is using the property for his own purposes then he cannot be said to have delivered up vacant possession. Equally, if the physical condition of the property is such that there is a "substantial impediment" to the property owner’s use of the property, vacant possession will not have been delivered up. What is a "substantial impediment" will turn on the facts of the case and in Hynes v Vaughan Scott J (as he then was) found that any chattels left behind will only be an impediment if it would be exceptional to find those items in a property of that particular type.
The development of the case law
Ibrend Estates BV v NYK Logistics Rimer LJ held that for vacant possession to be given, the owner had to be able to "enjoy immediate and exclusive possession, occupation and control." The tenant still had a security guard and workmen at the property, and was still holding the keys on the break date. The owner therefore could not take immediate and exclusive possession.
In Riverside Park v NHS Property Services, the tenant's break clause was conditional on giving up vacant possession. A licence for alterations was agreed at the same time as the lease, allowing the tenant to install various items, including demountable partition walls. These were bolted to the floor and ceiling, but could be un-bolted and moved around. The High Court held that because the walls were easily removable, without damaging the building, they were chattels. At the break date, the landlord argued that the tenant had not given back vacant possession because the items (including the walls) permitted by the licence had not been removed. The tenant argued that the items did not constitute an impediment to the landlord's use of the property and therefore the break was valid. The court held that the tenant had not given back vacant possession. In particular, the layout of the partitioning was such that it was unique to the tenant and not beneficial to the landlord, meaning that the landlord’s use of the property was substantially impeded.
Capitol Park Leeds PLC v Global Radio Services Limited
As a result of those cases and others, some tenants felt that the safest strategy was to 'over-comply' with the condition: ensuring goods, personnel and contractors were removed, keys returned, and alterations including partitions were removed and made good.
In Capitol Park, now in appeal, the tenant served a break notice on the landlord. Successfully exercising the break clause was conditional on the tenant giving up vacant possession of the premises.
By the break date, the tenant had removed a number of items (including ceiling tiles, lighting and heating) as part of carrying out dilapidations work, with a view to replacing them before vacating. It was common ground that these items were the landlord's fixtures and fittings. After unsuccessfully trying to reach a financial settlement with the landlord, the tenant stopped the work and did not replace the items it had removed.
The landlord's case was that the tenant, by removing the landlord's fixtures and fittings, had not given up vacant possession. It argued that the premises the tenant had returned were not the same as those defined under the lease. The definition of the premises under the lease included the phrase "…but including all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings…"
The tenant argued that it had given back vacant possession and the break condition had been complied with, because the premises were free of people, the tenant's chattels had been removed and it did not have any legal interest in the premises.
The court found that the requirement to give up vacant possession had not been satisfied, because the tenant’s removal of the landlord's fixtures and fittings resulted in the landlord's use of the property being substantially impeded. The judge said that the tenant had given the landlord "an empty shell of a building which was dysfunctional and unoccupiable."
Tenants obliged to give up vacant possession should consider very carefully the steps needed to comply and take appropriate advice, in particular if any alterations have been made to the property. It is clear from the case law that what is deemed to be 'vacant possession' will turn on the specific facts of a case, and trying to agree what can and cannot be removed may not be enough. The 'if in doubt, whip it out' approach is no longer justifiable. However, this position may change again once the Capitol Park appeal has been heard.
The Code for Leasing Business Premises 2020 provides that, as a matter of best practice, break clauses should only be conditional on the tenant paying the basic rent up to the break date, giving up occupation, and leaving no subtenants or other occupiers. Despite that, references to vacant possession in break clauses persist. In view of the expensive and uncertain litigation that can follow, there is an argument for avoiding use of the term 'vacant possession' altogether and being more precise about the steps that are to be taken to comply with the break clause.