Summary and implications

Whether in relation to buying, selling or granting a lease of property, the term “vacant possession” is commonly used within the real estate industry. Although it may seem self-explanatory, what constitutes vacant possession has been subject to significant judicial scrutiny and the recent case of NYK Logistics (UK) Limited v Ibrend Estates BV serves as a reminder of the careful consideration that should be given when either requiring or accepting an obligation to give vacant possession.

Failure to providing vacant possession can potentially lead to significant and even ongoing liabilities. Although the facts of any particular case will have a bearing on exactly what is required, the following principles should be followed when providing vacant possession:

  • The property must be empty of people. This includes employees, security personnel and even trespassers;
  • The party expecting to receive vacant possession must be able to assume and enjoy immediate and exclusive occupation, possession and control of the property; and
  • All chattels must be removed from the property. Leaving anything behind (including rubbish) could constitute a breach of the obligation.

NYK Logistics (UK) Limited v Ibrend Estates BV

To read the full judgement of the case click here

The relevance of vacant possession

The Standard Commercial Property Conditions (Second Edition) are incorporated into almost every commercial sale and purchase contract. Without amendment, these conditions impose a contractual obligation that the property will be sold with vacant possession (or subject to a specific lease).

On the grant of a lease, in the majority of cases, the documentation will provide that the landlord will give vacant possession to the tenant on completion. Equally, on expiry of the lease, the tenant will have an obligation to yield up the premises to the landlord with vacant possession.

It is also common to see vacant possession as a pre-condition to the exercise of a break clause. The majority of recent case law where the meaning of vacant possession has been argued relates to circumstances where it has been claimed that a tenant has not provided vacant possession to the landlord and has not therefore validly exercised the break.

A breach of the contractual obligation to provide vacant possession in any of the circumstances above could give rise to claims and resulting liabilities. However, where a tenant fails to exercise a break validly, the lease will continue in full force and effect and the tenant will be obliged to keep paying the rent and complying with the tenant’s covenants for the remainder of the term, which could be a number of years.

NYK Logistics (UK) Limited v Ibrend Estates BV

The parties in this case had entered into a lease of warehouse premises. The lease contained a break clause which entitled the tenant to break subject to the tenant complying with several pre-conditions, one of which was to give vacant possession to the landlord on the break date.

The tenant served a valid break notice to break the lease on Friday 3April 2009. Several days prior to 3 April, the tenant realised that the repair works that it was undertaking to the property (which were not a pre-condition to the break) would not be completed by 3 April.

The tenant suggested to the landlord that it should be allowed a further week to complete the repairs and during that period, it would continue to pay for security guards at the property. The tenant also offered to hand the keys back to the landlord so that during the week period the landlord could have access to the property. The landlord did not respond to the tenant’s suggestion.

Over the weekend, the tenant maintained its security of the property and on Monday morning, the tenant’s contractors entered the warehouse and proceeded to complete the remaining repair works.

Shortly after that, the tenant received a letter from the landlord’s lawyers stating that the lease had not been effectively terminated because the tenant had not complied with the obligation to give vacant possession on the break date.

Decision

The Court of Appeal ruled that the tenant had not given vacant possession to the landlord on the break date and therefore the break was ineffective and the lease would continue in full force and effect.

The tenant’s attempt to reach agreement with the landlord to permit access after the break date was described by the court as a “sensible proposal”, however, the tenant knew that it had to obtain the landlord’s agreement to continuing occupation by the break date and it had not. As a result, on and after the break date, the property was not empty of people and the landlord could not have assumed and enjoyed immediate and exclusive possession, occupation and control of the property.

Furthermore, the tenant had done nothing to demonstrate that it was actually giving up possession of the property. Although the tenant offered to return the keys, it did not do so and the tenant retained exactly the same control of the property after the break date that it had enjoyed before.

What the tenant should have done was to return the keys to the landlord and remove all personnel and chattels from the property. It could have then approached the landlord the following day and requested permission to return to carry out the works as a licensee.

Implications and further points to consider

The decision in NYK Logistics reinforces the fact that failure to comply with an obligation to give vacant possession can lead to significant ongoing liabilities. It also raises the question of whether, as a tenant, it is always appropriate to agree to a vacant possession obligation, particularly in the context of a break clause.

Previous case law on the subject of vacant possession conditions in break clauses has influenced the approach in practice to agreeing heads of terms and lease negotiations. It is not uncommon now to see leases where there is either a heavily qualified or no vacant possession obligation as a pre-condition to a break.

The Code for Leasing Business Premises in England and Wales 2007 (the Code) states that the only pre-conditions to a tenant’s break should be:

  • That the main rent has been paid up to date;
  • That the tenant should give up occupation of the property; and
  • That no continuing sub-leases should be left in place.

Interestingly, there is no suggestion in the Code that a tenant’s obligation to provide vacant possession upon expiry of the term (where no break has been exercised) should be qualified. This is a clear recognition by the real estate industry that failure to meet the strict criteria that vacant possession imposes can result, arguably, in a disproportionate liability if the break is not effectively exercised.

The decision in NYK Logistics simply affirms that the term vacant possession is not a simple or straightforward concept and any vacant possession obligation should be considered with these factors in mind.