Riverside Park Limited –v- NHS Property Services Limited  EWHC 1934 (Ch)
Secretary of State for Communities and Local Government –v- South Essex College of Further and Higher Education 
What’s mine is yours – and what’s yours is a mine(field)
In two new cases that underline the vital importance of complying with pre-conditions, tenants have failed to break their leases because they did not give up vacant possession of the premises.
Both tenants had left partitions in place that, whilst not fixed to the premises and therefore tenant’s chattels, were nonetheless sufficiently intrusive to prevent the landlords from having full enjoyment of the properties. Consequently the tenants failed to yield up with vacant possession and to comply with the pre-conditions to their break options, meaning that their leases did not terminate on the break date.
The cases sound a warning note for tenants, but also provide clarification on vacant possession and tenant alterations.
In the Riverside Park case, the landlord granted a ten year lease to the NHS on 24 September 2008. The definition of “premises” included internal non-load bearing walls and all additions, improvements, fixtures and fittings, save for tenant/trade fixtures and fittings. At the time, the property was open plan.
The lease permitted internal non-structural partitioning, but it had to be removed before the end of the term if required by the landlord. There was a tenant option to break the lease on 24 September 2013 subject to the following pre-conditions:
- The tenant had to give at least six months’ notice
- The tenant had to give vacant possession on or before 24 September 2013
There was also a licence for alterations, including the installation of partitions, kitchen units and an alarm. The tenant had to reinstate the premises if required by the landlord at the end of the lease or if the licence were terminated. The tenant admitted that it had breached the licence requirements in that it had failed to obtain prior approval for the works from the insurer. Nor had it not given notice to the landlord of the commencement and completion of the works.
On 18 March 2013 the tenant served its break notice. By 24 September 2013 it had vacated and ceased payments of rent. The landlord inspected, found that the tenant had not removed various items, and claimed that the lease was continuing.
The second case, involving South Essex College, had remarkably similar facts. South Essex College had an eleven year term of commercial premises that had been divided up by use of partitions to create teaching rooms and other areas. The lease had a break notice that enabled the tenant to terminate the lease on 20 September 2012 if it paid the rent and gave up vacant possession. The tenant paid the rent, but failed to hand back the key fobs and to remove its partitions and other chattels, including a large photocopier – which had a notice attached to it saying “do not move” – reception desk and computer screens.
In the first case, the landlord argued that the items left by the tenant, particularly the partitions, impeded its use of the premises, meaning that the tenant had not given vacant possession.
In response the tenant argued that:
1. The partitions were fixtures that had become part of the premises. As such they did not have to be removed, but rather had become part of what had to be yielded to the landlord;
2. The partitions did not impede vacant possession;
3. As the landlord had not required it, there was no obligation to reinstate the premises to the original condition.
In the second case, the landlord made the same points. The tenant responded that it had done nothing to retain possession and that the items left behind were portable and did not interfere with the landlord’s ability to take back possession. It argued that the partitions were a reinstatement item for the terminal dilapidations claim rather than a vacant possession point.
The Court found in favour of the landlord in both cases. In the Riverside Park case, the Court held:
1. To decide whether an item is a chattel or a fixture requires objective consideration of the “purpose and degree of annexation”, i.e. how and why the item has been fastened to the premises.
The major items here were the tenant’s demountable partitions. They were capable of being removed without damage, and had been installed for the benefit of the tenant rather than to create a lasting improvement. Consequently, they were tenant’s chattels that could be removed, rather than fixtures that had become part of the building.
The Court also considered items other than the partitions: freestanding kitchen units, floor coverings, blinds and water standpipes, and the failure to yield up key fobs and deactivate the alarm. It held that these items were also chattels. However, given their minor nature, had they been left in place without the partitioning, vacant possession was likely to have been given. As the key fobs and alarm could be deactivated, this would also not have been sufficient to impede vacant possession.
2. If chattels caused a substantial impediment, then vacant possession had not been given. In this case, the partitions, described by the landlord as having created “a rabbit warren” of tiny offices, did impede the landlord’s enjoyment of the premises.
The landlord was not obliged to provide evidence that the property could not be let to a new tenant because of the partitions, but “enjoyment” of the premises included having them in a condition which would be attractive to new tenants – in this case open plan.
3. When interpreting documents, the Court must identify the parties’ intention by applying the following test: What would a reasonable person, using the background knowledge available to the parties and the language in the contract, have believed they meant to achieve? Here, the Court found that the reasonable conclusion would be that the partitioning was not incorporated into the definition of “premises”.
However, even if the partitioning had become part of the premises, the tenant had not complied with the requirements of the licence when installing it. As such, the works were actually without landlord’s consent, and should have been removed even if the landlord had not given notice.
In the South Essex College case, the Court found that, whilst retaining keys was not by itself sufficient to prevent vacant possession, the tenant had done nothing sufficient to “demonstrate to the outside world” that it had given up possession. There was no correspondence to confirm giving up possession and no handover meeting. The judge found that it was more akin to an abandonment of the premises than yielding up vacant possession.
The judge also found that the tenant was continuing to use the premises by storing items such as the desk and photocopier on the site.
Finally, the Court also held that the landlord was impeded from enjoying possession of the property because of the partitions and other bulky items.
Both tenants therefore remain on the hook until the end of their contractual lease terms.
Although these decisions give useful clarity, every case will depend on its own facts. Landlords and tenants need expert advice on the status of an item and the works that are required. These cases show that this is particularly important for items such as partitions, where that status can be murky.
The cases shine a spotlight on a difficult conundrum: that a substantial item such as a mezzanine floor will probably not breach a vacant possession requirement, but a smaller item quite possibly will. They demonstrate the need to consider how and why the item has been installed. If the item has become part of the premises, then the landlord may have a claim for the tenant’s failure to remove it, but it cannot impede vacant possession, because it is part of the property that has been yielded up. However, if the item has not become part of the premises, then it can be an impediment. The consequences of this distinction can be very serious, as the tenant in this case discovered.
The cases also highlight that a pre-condition to yield up with vacant possession can be fatal to a break clause. Landlords should carry out a careful inspection once a tenant has vacated. Tenants with existing leases should seek advice at an early stage as to whether removal will be required, as this will not necessarily be obvious from a surface glance. Tenants taking new leases should consider resisting vacant possession as a pre-condition. A covenant to remove all occupiers could be agreed instead.
It is also worth noting that the status of an item is relevant in other contexts too, for example whether a tenant has the right to remove a valuable installation. Similarly, the status of an item can affect issues such as SDLT. The cases may also assist with issues outside the topics of break options and vacant possession.