Break clauses allow a party to a lease (typically the tenant) to bring the lease to an end before expiry of the fixed term. The break clause might require some sort of action to be taken, such as payment of all rent and giving vacant possession of the premises to the landlord. Where a party fails to comply with the conditions of a break it will be ineffective, and the lease will continue.
The recent case of Capitol Park Leeds Plc v Global Radio Services Limited should act as a cautionary warning to those tenants focused on "doing a deal" instead of satisfying break conditions. It also serves as a salutary nod to landlords that the courts will demand strict compliance with break conditions.
The tenant held a lease of business premises for a term of 24 years, due to expire on 11 November 2025. On 15 February 2017, it served a break notice upon the landlord to terminate the lease on 12 November 2017. One of the conditions of the break required the tenant to give vacant possession of the premises to the landlord on the break date.
Prior to the break date, the tenant had stripped out various features in the premises, including 17 original items such as radiators, sub mains cables, window sills and the air conditioning system.
The landlord argued that by returning the premises to it minus these elements and fixtures, the tenant had failed to give vacant possession of the premises.
The tenant raised two arguments: 1) that these were issues to be dealt with in a dilapidations context after the event, which did not impact on its ability to give vacant possession; and 2) the landlord had agreed a halt to any works, because a cash settlement was to be agreed. It, therefore, could not now renege on that agreement.
What is vacant possession?
The obligation on a tenant to give 'vacant possession' is said to be threefold: return the premises to the landlord free of people, possessions and legal interests (such as sub-tenancies). We'll call this the 'PPI standard'.
The court said that there were two possible tests it could adopt when looking at whether the PPI standard had been met:
1. (Subject to the rule that trivial matters will not apply) has the tenant left property in situ? If so, it will not give vacant possession, because the act of doing so is a claim to a right to use the premises.
2. Does a physical impediment exist, which substantially prevents or interferes with the enjoyment of the right of possession of the premises, or a substantial part of it?
The difficulty for the parties and the court in this situation was that previous cases had dealt only with situations where a tenant left items behind; and, that these two possible tests did not assist the court in circumstances when items were taken away by the tenant.
The court's view
The first test simply did not apply to the facts of the case so, the court looked to the second test. In finding that the second test had been met, the court said that the physical condition of the premises returned by the tenant (i.e. without the 17 offending items) was such that there was a substantial impediment to the landlord’s enjoyment of the premises or part of it. Without the 17 items the tenant had removed, the Landlord could not fully enjoy the premises.
Of the tenant's alleged agreement with the landlord to halt works and find a cash settlement, the court said that it preferred the evidence of the landlord that no such agreement had been reached. There was nothing in writing. If such an agreement had been reached, it would be reasonable to expect the tenant to have referred to it in communications after the meeting. But, the tenant had not do so, until it was challenged on the efficacy of the break.
What to take from this?
Firstly, even if there is nothing that physically prevents a landlord from taking possession of premises, if something substantially interferes with its enjoyment of those premises, there will be no vacant possession and the tenant may have lost its right to break.
Secondly, the tenant allowed the clock to run down to the break date, leaving itself with no time to meet the break conditions. It then could not change its strategy of negotiating a cash settlement and instead undertake the necessary works. It must have been confident that, when the dilapidations discussions failed, the tenant could only give back to the landlord "considerably less than the Premises as defined in the lease". As a result, the break would not be effective and the lease would continue for a further 8 years.
If nothing else, Capitol Park should act as a reminder to both landlords and tenants of the importance of seeking early, dispute-avoidance advice about how to break a lease.