My way

We haven’t had to write a case note recently on break clauses in leases. Unfortunately disputes about these, and whether or not the tenant has met the requirements of the clause continue to occupy considerable judicial time. Here we look at another common pre-condition in termination clauses, the obligation to give the landlord ‘vacant possession’ by the expiry date of the tenant’s notice. Most tenants assume that they know what that phrase means in common parlance. But what does it mean in law? A recent case [1] gives us some clues.

No one is innocent

Here a tenant occupied an office building and served notice to terminate the lease early. The lease contained a requirement for the tenant to give vacant possession on expiry of its notice. The tenant’s predecessor (under the same lease) had carried out extensive works to subdivide the original open-plan space into cellular offices by erecting partitioning. Whilst the predecessor had asked the landlord for permission to do them, the works had not been carried out strictly in accordance with the terms of that consent. As it turned out, this seemingly small oversight had a significant effect.

Problems

When the tenant moved out of the building it left behind all the partitions. The landlord refused to accept that the tenant had complied with the relevant vacant possession condition, arguing that the partitioning works interfered with the intended layout of the building as an open plan office. The tenant tried to argue a number of legal points, including the fact that because the landlord had agreed to their installation, it could not object when the partitions were left behind at the end of the lease. Alternatively, it said, installing these ‘fixtures’ meant that they vested in the landlord as part and parcel of the premises. The tenant was obliged to give back vacant possession of ‘the premises’ and by operation of law these works were deemed to form part of those premises.

No feelings

Here (as is often the case) the court sided with the landlord. The judge made a number of key points.

As the original works had not been carried out in compliance with the terms of the original consent, the works were unauthorised. The other lease terms (and those in the original consent for the works) made it clear that the tenant was responsible for removing unauthorised works and it was obliged to do so, come what may. Whilst the other provisions of the leases obliged the landlord to tell the tenant if it required ‘alterations’ to be removed before lease expiry, that obligation could only apply to ‘permitted alterations’ – it would be nonsense for the landlord to have to tell the tenant to remove alterations which it wasn’t ‘allowed’ to have made in the first place.

Vacant possession (in the legal sense) does not just mean leaving the building clear of people; it includes leaving it clear of anything else which would “substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property“ (a passage taken from another leading case on the meaning of vacant possession which the judge quoted). In this case the works had significantly affected the configuration of the building. It was not suggested that the building was rendered useless by the alterations, but it was sufficiently different that the landlord could not re-let the offices without carrying out substantial works itself. And that meant that the vacant possession requirement had not been met.

Most leases distinguish between ‘landlord’s fixtures’ and ‘tenant’s fixtures’, and this was another crucial factor here. A tenant’s fixture is generally one which the tenant can easily remove without causing damage to the landlord’s building. More substantial works (for example extending an existing building) can have the effect of making the fixture become part of the landlord’s premises, especially where the structure has a sufficient degree of permanence (although this is very much an issue of fact in any given instance). Here the partitioning was very simply fixed to the floor and suspended ceilings and was capable of being easily unbolted and removed. Whilst it might not have been especially useful to the tenant (unlike many other fixtures which tenants install which they do want to take with them) it remained very much in the ‘tenant’s fixtures’ camp so the tenant could not argue that it was irremovable.

Watcha gonna do about it?

This looks like a terribly unfair decision for the tenant; after all, it may not have known that its predecessor’s works were not carried out in compliance with the earlier consent. Nonetheless, thorough due diligence and due care to all the lease provisions (with timely legal input) would have saved the day. By any reasonable reading of the case this is a situation which the tenant could easily have avoided by taking the initiative and seeking clarification of the landlord’s position, or if this was not forthcoming, by carrying out the decommissioning of the works and reinstatement of the property to substantially its original layout. And then it would most definitely have been vacant...