In Capitol Park Leeds Plc v Global Radio Services Ltd [2021] EWCA Civ 995 the Court of Appeal has clarified the law on break clauses, and particularly whether breaks can be affected by the condition in which the tenants hand back the premises. The Court of Appeal's decision will be of interest to both landlords and tenants.

The question before the Court of Appeal was this: if a tenant hands back a building which is so dilapidated that it no longer resembles the premises demised by the lease, has the tenant given vacant possession of the premises?

Facts

Capital Park Leeds Plc (CPL) was the landlord and Global Radio Services Limited (GRS) was the tenant. GRS’ lease expired in 2031. However, GRS had an option to break the lease on 12 November 2017. It was a condition of the break that GRS delivered up vacant possession of the premises to the landlord on, or before, the break date. In the lease, the premises were defined as including:

“any fixtures and fittings at the Premises wherever fixed, except those which are generally regarded as tenants or trade fixtures and fittings, and all additions and improvements made to the Premises.”

GRS served a break notice on CPL stating its intention to terminate the lease. GRS then started to carry out reinstatement works. These works included the removal of various fixtures and fittings, which belonged to the landlord. Simultaneously, the parties entered into negotiations regarding the scope of the break conditions. These negotiations broke down and GRS vacated the property, on the break date, with its reinstatement works unfinished.

High Court decision

The High Court ruled that GRS had not given vacant possession of the premises to CPL, on the break date. It held that GRS was not entitled, under the terms of the lease, to hand back a building that was dysfunctional and unoccupiable. In addition, the Court held that as the tenant had handed back less than the defined premises (i.e. because various fixtures and fittings had been removed), it had not given vacant possession.

Court of Appeal decision

On 5 July 2021, the Court of Appeal overturned the decision of the High Court. It held that giving vacant possession of a premises simply required it to be handed back to the landlord free of people, chattels and legal interests. The premises did not however need to be in any particular physical condition. In its ruling, the Court of Appeal applied the High Court's approach in Goldman Sachs International v Procession House Trustee Limited [2018] EWHC 1523 (Ch) – a case in which we acted for the tenant.

The Court of Appeal also noted that CPL could have made the break conditional on GRS having observed and performed the repairing covenants in the lease. However, it did not do so. Therefore, the failure to leave the premises out of repair, did not prevent GRS from exercising its option to break. CPL’s remedy was to pursue GRS for a terminal dilapidations claim.

The Court of Appeal affirmed that conditions prescribed in a break clause were to be strictly complied. However, it did not follow that the conditions should be interpreted so as to favour the landlord.

Comment

The Court of Appeal’s decision comes as no real surprise, as the approach taken by the High Court appeared to be a departure from orthodoxy and would have had wide-ranging ramifications, if upheld.

It also represents a customary reminder of the importance of precise legal drafting - GRS' conduct could have prevented it from breaking the lease, but only if the break conditions had expressly provided for this.

As ever, we would strongly recommend that landlords take advice, as soon as they receive notice that tenants wish to break their lease. Similarly, given the importance of strictly complying with the terms of the lease, tenants should seek advice before attempting to exercise a break option.