NYK Logistics (UK) Ltd v Ibrend Estates BV  [2011] EWCA Civ 683

The Court of Appeal's comment on a decision of Sheffield County Court has been eagerly awaited by both landlords and tenants.  The case reinforces the risks for ill-advised tenants when attempting to exercise conditional breaks in leases. 

The County Court ruled that the tenant had failed to comply with the conditions of its break clause which were payment of the rents due and delivery of vacant possession. The tenant's undoing was the presence of its workmen in the premises, who were carrying out works in the week following the break date (3 April 2009). 

Although the County Court ruled that the presence of the tenant's security guard and a small quantity of the tenant's goods at the premises was not fatal to the tenant meeting the conditionality of the break, the continued presence of the tenant's workmen led to its failure successfully to meet the express condition of its break clause.  The tenant had remained in possession beyond the break date, for its own purposes and in the absence of any evidence that the landlord had agreed to waive the conditionality of the break clause.  There being no unequivocal assertion by the landlord that any of these breaches were waived, the lease continued.

The Court of Appeal has upheld the County Court's decision. NYK has, however, sought leave to appeal to the Supreme Court.

The County Court decision

The defendant, NYK, was the tenant under a lease of warehouse premises.  The lease contained a break clause which allowed the tenant, upon giving six months' notice to the landlord, to bring the lease to an end on 3 April 2009 (the break date).  The express conditions which the tenant had to meet were twofold: (1) pay the rent up to date and (2) yield up the premises with vacant possession on the break date. 

The tenant gave valid notice of its intention to break the lease on the break date.  The landlord and tenant entered into discussions about the tenant's repairing and redecorating obligations, which the parties decided were such that it would not be possible to carry out the works by the break date. As a result of that, the tenant suggested that it would carry out the repairs in the week following the break date and, during that time, that it would maintain the security cover at the premises. No formal agreement was, however, reached. The tenant's workmen continued to carry out repairs until 9 April 2009.  On the break date, some items of the tenant's property, namely its security staff and its workmen, as well as some small items, remained in the premises.  Given the tenant's continued presence after 3 April 2009, the landlord contended that the tenant had failed to comply with the conditionality of the break clause and the lease therefore continued. Accordingly, the landlord made an application to the County Court for a declaration that the tenant had not complied effectively with the relevant conditions and had failed to break the lease on the break date by virtue of the lack of vacant possession.  The County Court ruled in favour of the landlord, but the tenant appealed to the Court of Appeal.

The test for "vacant possession"

There is a raft of cases which address the meaning of "vacant possession", but the lead authority is Cumberland Consolidated Holdings Limited v Ireland (1946), which sets out two alternative tests:

  1. Does the tenant/seller continue to use the premises for its own purposes in a non-trivial way (subject to the de minimis rule).  This test goes to whether vacant possession has been provided in the event that the tenant/seller's property is left in the premises, in a way that is consistent with the continued use of the premises for the tenant/seller's own purposes.
  2. Is there a "physical impediment" to a substantial part of the premises which presents a "substantial obstacle" to the landlord/buyer's use and enjoyment of those premises. As before, this will be relevant to whether vacant possession has been provided and whether the landlord/seller's use of the premises was impeded as a result.

The above two tests are independent of one another, so only one of these needs to be made out to show that vacant possession was not provided and thereby scupper the tenant. 

The Court of Appeal's judgment

Rimer LJ, giving the leading judgment of the Court of Appeal, stated that he was not convinced that the decision in Cumberland, which he stated was "plainly an exceptional one on its facts", was of great assistance on the very different facts of the NYK case.

To meet the conditions of its break clause NYK had to have given "vacant possession".  Rimer LJ stated that "the concept of vacant possession in the present context is not, I consider, complicated.  It means what it does in every domestic and commercial sale in which there is an obligation to give 'vacant possession' on completion.  It means that at the moment that 'vacant possession' is required to be given, the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it.  It must also be empty of chattels, although the obligation in this respect is likely only to be breached if any chattels left in the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property. In the present case NYK did not give such possession to Ibrend on 3 April".

What is clear is that, whilst the tenant had covenanted to repair and redecorate, there was no obligation on it to complete any such works before the break date of 3 April 2009: these were not "break clause conditions" which the tenant had to meet in order to comply with the break clause and terminate its lease.  NYK remained in possession simply for its own purposes - to avoid having subsequently to pay a dilapidations sum in excess of its own cost of carrying out the works.

Rimer LJ suggested that NYK "ought also to have known that, when [the landlord's agreement to  extend it occupation for a week, without prejudicing its ability to meet the break conditions] was not forthcoming by 3 April, its only safe recourse was to move everyone out of the warehouse on Friday, including its security guard; to have emailed Ibrend's agents on that day to explain that that was what it was doing and that it would the same day deliver the keys to the agents"

Unfortunately, NYK did not do so. By 3 April 2009, Rimer LJ concluded that NYK "had done nothing by then to manifest that it was giving up possession.  It had offered to return the keys, but had not done so.  It maintained on and after 4 April exactly the same control of the warehouse that it had maintained on and before 3 April.  It remained in occupation of it on and after 4 April in the like manner as it had on 3 April; and it manifested that occupation by bringing its workmen to the warehouse on 6 April in order to continue with the works."

The only conditionality attaching to the break clause was the payment of rent and the giving of vacant possession, so there was nothing to prevent the tenant from addressing dilapidations issues with the landlord after the break date.  Indeed, it would have been well advised to have done so.  There was no evidence that the landlord had agreed to the continued presence of the tenant's workmen, or that the making of arrangements to hand over the keys to the  premises on the break date was an unequivocal assertion by the landlord that any breaches would be waived, which was the fall-back argument advanced by NYK. In relation to that point, Rimer LJ upheld Sheffield County Court's decision that there had been no waiver.

By continuing to occupy after the break date of 3 April 2009, the tenant jeopardised its ability to break the lease on that date.  The Court of Appeal ruled that the lease continued. 

Practical implications

The most important message in relation to the conditionality of break clauses is that express conditions must be complied with in the strictest possible sense.  It is essential to determine well before the break is operational what the conditions of the break clause are, which provisions are not conditions, and to differentiate those from covenants that the tenant must comply with, but which would only result in a claim for damages against it, rather than jeopardising its ability to break the lease. 

In the event that the landlord is willing to agree to waive a condition of the break clause, it is essential that this is formalised in writing.  Landlords should be aware that less formal agreements with tenants could lead tenants to believe that compliance will not be required and such communications may invite subsequent claims from tenants that the landlord has waived compliance.

Tenants should always ensure that every effort is made to comply until the landlord formally waives that requirement in writing.  The case law in relation to what is required to give "vacant possession" does not present a black and white picture, but this recent case surely serves as a reminder that strict compliance with the conditionality of any break clause is to be considered essential if it is to operate.