Vacant possession and break clauses – updated

Harriet Allsop, Associate in the Russell-Cooke Solicitors, property litigation team.
Harriet Allsop
3 min Read

In October 2020, the High Court handed down its decision in Capitol Park Leeds PLC v Global Radio Services Limited. To summarise, the tenant (Global Radio) served a break notice on Capitol Park to terminate its lease. One of the break clause conditions was that the tenant had to give up "vacant possession" of the premises. The tenant removed items which were actually the landlord's fixtures and fittings; these included ceiling tiles, fire barriers, floor finishes, pipework, lighting, smoke detection systems and radiators. By removing the landlord's fixtures and fittings, the High Court held that the "vacant possession" condition had not been satisfied, because the removal of the items "substantially impeded" the landlord's use of the property. Therefore, the break clause had not been validly exercised and the lease would continue to run until its contractual end date in 2025.

A fuller discussion of the High Court decision can be found in our previous briefing.

What's the latest?

In July 2021, in a decision that will be heartening for tenants, the Court of Appeal reversed the High Court's decision. The Court of Appeal had to consider whether the tenant's removal of the various fixtures and fittings meant that vacant possession of the premises had not been given back to the landlord, as required by the break condition. 

The landlord's argument was that, to comply with the break condition, the tenant was required to give back “the Premises”. The definition of "Premises" under the lease included "all fixtures and fittings at the Premises whenever fixed" (except tenant's fixtures). The tenant had removed such fixtures and therefore, on the landlord's case, the tenant had not complied with the break condition.

On appeal, the tenant submitted that the break condition was not concerned with the physical state of the Premises. The tenant argued that the break condition was concerned with whether the landlord was recovering the Premises free of "things, people and interests". The tenant argued that the break condition was inconsistent with the yielding up covenant, which required "a state of repair condition and decoration which is consistent with the proper performance of the Tenant's covenants".

On the tenant's case, it was argued that the landlord's interpretation of the break condition was contrary to business common sense and would clearly result in consequences not intended by either party. The tenant argued that the word “Premises” in the break condition should be understood to mean "the Premises as they are from time to time".

The Court of Appeal agreed with the tenant. Even though the premises had been returned in a poor state to the landlord, the tenant had not been precluded from validly exercising the break clause. Newey LJ found that, because the break condition made no mention of repair or condition, in contrast to the wording of the yielding up covenant, more weight was given to the tenant's argument that the break condition was not concerned with matters of repair and condition.

On that basis, the landlord's remedy was to seek compensation from the tenant for whatever losses it had incurred as a result of the premises being left in such a poor state.

Where do we go from here?

As a result of this appeal, it is still apparent that a break condition which requires "vacant possession" to be given will turn on the specific facts of a case, and tenants seeking to exercise a break clause with such a condition should still take appropriate advice prior to serving a break notice.

No mention was made in the judgment of the Code for Leasing Business Premises 2020, which provides that break clauses should only be conditional on the tenant paying the rent up to the break date, delivering up occupation and removing any sub-tenants or occupiers. References to vacant possession still persist, and are likely to do so. As a result of the Capitol Park decision, there remains an argument for not using the words "vacant possession" at all and using more precise language about the steps that are required to validly exercise a break clause.

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