In uncertain times, business tenants will look to minimise their property commitments in order to reduce costs. One of their options may be to exercise a break in a lease if such an option is included. However, case law has demonstrated the importance of tenants (and landlords) strictly complying with any conditions that are attached to a break clause. Often, this includes giving a landlord vacant possession, following the exercise of a tenant’s break notice. Failure to do so can be costly and have drastic consequences for a tenant; any failure to comply with a condition is likely to invalidate the break, resulting in the lease continuing for the remainder of the original term.
This is a brief summary of the key points for a tenant to consider in providing vacant possession upon exercise of a break clause.
What does a tenant’s obligation to give vacant possession mean?
Generally an obligation to give vacant possession means that the tenant must give up possession of premises thereby enabling the landlord to get immediate occupation. The landlord must be able to enjoy use and occupation of the property without any obstruction or obstacle.
So what practical steps must a tenant take?
- remove all its chattels, rubbish and personal belongings from the premises,
- take advice on whether tenant’s fixtures such as non-structural demountable partitions have to be removed (see below) and whether reinstatement of any alterations is required,
- Give vacant possession which means that the landlord can get immediate occupation free from any tenants, licensees/people or third parties, you move out on or before the break date and return all keys and access codes for any alarms to the landlord or its agent.
In NYK Logistics (UK) Ltd v Ibrend Estates BV , the Court of Appeal held that a tenant had failed to give vacant possession because its workmen remained in the property to complete repairs. The tenant also employed a security guard for a further week following the break date due to concerns that the property would be vandalised.
What amounts to a tenant’s fixture?
This is not always an easy question to answer, but the following cases demonstrate the important factors to consider:
- In Riverside Park Ltd v NHS Property Services Limited , the High Court considered whether the tenant had given vacant possession which was a condition of its ability to exercise the break. During the term of the lease, the tenant had carried out various works, including installing partitioning. However, the tenant failed to remove partitioning prior to the break date. The landlord argued that the tenant had not given vacant possession. The tenant’s argument was that the partitioning was a tenant’s fixture and as it had been left in situ, it had become part of the premises and therefore there was no obligation on the tenant to remove it. The court disagreed and found that the partitioning were chattels and amounted to a physical impediment to the property’s use thereby invalidating the operation of the break clause. Accordingly the tenant remained liable to comply with the obligations under the lease for the remainder of the term.
- In Goldman Sachs International v Procession House Trustee 1 Limited and Procession House Trustee 2 Limited , the tenant sought a declaration from the court of the correct construction of a break clause, in advance of its exercise. It was accepted between the parties that the break clause was conditional on the tenant yielding up the premises with vacant possession on the break date but the landlord argued that it was also conditional upon full compliance with the tenant’s reinstatement obligations under the lease. The break clause required the tenant to yield up in accordance with another clause which required full vacant possession and which in turn referred to a second clause requiring removal of additions and alterations and reinstatement of the premises to its original layout in accordance with a specification. The Court interpreted the conditions narrowly in favour of the tenant and held it was not required to reinstate the alterations it had made. The High Court found that the "natural and ordinary meaning" of the break clause was to impose a single condition to yield up with vacant possession. In light of the drastic consequences for a tenant of failing to comply with a break condition and applying the contra proferentem rule (i.e. where there is doubt as to the meaning of the contract, the words will be construed against the person who put them forward), it was incumbent on a landlord to make the extent of any such conditions very clear.
- Capitol Park Leeds plc v Global Radio Services Limited  was a very odd case in that the tenant had not left chattels or other items behind but it had stripped out parts of the property including essential fixtures and fittings, such as ceiling and floor finishes. The lease required the tenant to give vacant possession of the premises which was defined to include the removal of fixtures and fittings (subject to exceptions) and additions and improvements. The High Court held that the premises were ‘dysfunctional and unoccupiable’ and the large amount of rubbish that had been left behind in the cellars, prevented the buyer from using this part of the premises because there was a substantial impediment to the landlord’s use of the premises. However, the tenant appealed and the Court of Appeal overturned the earlier decision determining that a condition for vacant possession requires the tenant to return the property to the landlord free from people, chattels and legal interests, rather than being concerned with the physical state or condition of the premises. The tenant had satisfied those requirements and the break was therefore valid leaving the landlord with a damages claim for any loss it might have suffered as a result of the strip out.
So this means that careful consideration has to be given for each item in question as to how it has been annexed to the premises. The extent of the annexation is relevant and if it can be argued that the fixture has become part of the land, leaving it in situ will not impede vacant possession being given. Particular attention needs to be given to the wording of the yielding up clause and the definition of the demised premises which may or may not include tenant’s fixtures and will have an impact on what vacant possession means in a particular case.
If a tenant is liable to remove fixtures, it will generally be obliged to make good any repair caused in so doing under the yielding up covenant. Any failure to do so will also constitute the tort of waste (deliberate or negligent act of causing damage to premises which in turn damages the landlord’s reversionary interest).
Finally, if the break has been validly exercised, that is unlikely to be the end of the matter and a tenant should be mindful of any liability for dilapidations.
The key message to take away is that whether you are a landlord or a tenant, it would be sensible to seek legal advice on these issues well before a break date. We advise both landlords and tenants regarding service of break notices and compliance with any break conditions.