In Riverside Park Ltd v. NHS Property Services Ltd [2016] EWHC 1313 (Ch) a tenant's break notice was held to be ineffective because the tenant had failed to remove demountable partitioning from the premises and consequently had not complied with the obligation to give vacant possession. This case will be of interest to landlords and tenants alike, especially in a post-Brexit world where the negotiation and exercise of break clauses are likely to become more frequent.

Background

In 2013 NHS Property Services Ltd, as tenant, purported to exercise a break right in a lease of premises at Riverside Park, Bromborough, Wirral. The landlord (Riverside Park Ltd) claimed that the notice exercising the break right was ineffective as the tenant had failed to comply with the obligation in the lease to give vacant possession on the break date. The landlord based its claim on the fact that the tenant had not removed certain works from the premises, including demountable partitioning. The tenant counter-argued that the relevant works constituted tenant's fixtures and fittings, and therefore it was not obliged to remove them in order to give vacant possession.

Did the works comprise chattels or tenant's fixtures and fittings?

First the court considered the degree of annexation. With the exception of one panel, the partitions were not attached to the structure of the property and, in the view of the joint expert, they were easily removable (the fixings being to the raised floor and the suspended ceiling). The presence of electrical installations within the partitions did not alter this conclusion.

Secondly the court acknowledged that "what is likely to be more decisive is the object and purpose of annexation" and found that the installation of the demountable partitioning had been for the benefit of the tenant rather than the lasting improvement of the premises. Accordingly, the court held that the partitions were chattels.

Did the ongoing presence of the chattels mean that the tenant had failed to deliver vacant possession?

One of the landlord's directors explained that as originally let the office space had been open plan. The subsequent works to install the partitioning had resulted in a unique configuration of the office space as a "rabbit warren" of small rooms. His view was that nobody else would wish to adopt this layout although no specific evidence was given to show that this was in fact the case.

Following guidance from previous cases the court applied the test of whether or not the presence of the partitioning substantially prevented or interfered with the enjoyment of the landlord's right to possession. Ultimately the court concluded that it did – the break notice was therefore ineffective.

Some points to consider

This case highlights the following points:

  • When classifying an item as a chattel or tenant's fixture, each case will turn on its own facts

Although the court classified most of the demountable partitioning in this case as chattels, the judgment indicates that in other circumstances, for example, where partitioning is firmly attached to the structure of the premises and cannot be easily removed, it may be treated as a fixture. As such each case will turn on its own facts.

  • A party under an obligation to give vacant possession should err on the side of caution

If premises are not cleared of chattels, a court may find that what remains substantially prevents or interferes with the enjoyment of the right of possession of a substantial part of the property, meaning that vacant possession has not been given. Consequently, a party under an obligation to deliver vacant possession should err on the side of caution and remove all chattels.

  • Tenants may want to consider whether vacant possession should be a condition to the exercise of the break right

At the drafting stage a tenant intending to have the benefit of a break right could consider excluding vacant possession as a condition to the successful exercise of the break. In line with the Lease Code 2007, the condition could be scaled back to an obligation for the tenant to give up occupation and leave behind no continuing subleases. This would then allow the tenant the right to exercise the option to break the lease without being fettered by the need to give vacant possession as a condition of same. Instead the issue of vacant possession could be dealt with subsequently under the yielding up obligation.

  • Prevention is better than no cure

This case illustrates that, if a party has any concerns as to what is required by the obligation to give vacant possession, it should seek advice well ahead of the relevant deadline. Where that obligation is a condition to the exercise of a break right, failure to comply will render the exercise of the break ineffective leaving the underlying lease (and all the burdens associated with it) in place. Once the break date has passed, there is no cure for failure to comply.

Other reading

For additional commentary on the difficulties of exercising break clauses, please refer to our previous alert, "An overriding omnishambles: recent break clause developments".