Summary: Two recent cases have shed light on what it means properly to yield-up premises with “vacant possession” in the context of break clauses. The cases also demonstrate the importance of ensuring that as a tenant, you have, by the break date, fully satisfied any and all conditions of exercising a break right. The consequences of failing to do so can be both serious and expensive.
The concept of ‘vacant possession’ is well-known to both landlords and tenants, but despite this, the true meaning of the term has been relatively opaque. It is, in modern institutional leases becoming less common, with well-advised tenants demanding certainty as to their obligations; given how strictly break clauses are construed there is no room for grey areas.
The two cases are:
- Riverside Park Limited v NHS Property Services Limited ; and
- Secretary of State for Communities and Local Government v South Essex College of Further and Higher Education .
The facts of each case were remarkably similar. In each instance the tenant had a fixed break right conditional on, amongst other things, giving up its respective premises with vacant possession on or before the break date.
In the Riverside Park case, the tenant served notice to exercise its break clause, quit the premises by the break date, and ceased paying rent. On inspection, the landlord discovered that it had left behind internal non-structural partitions, installed with consent.
Similarly, in the Secretary of State case (following the service of a break notice and subsequently purporting to quit the premises) the tenant left internal non-structural partitions together with other chattels such as a photocopier, computer screens and a reception desk. Additionally, it did not hand back its key fobs.
In each case, the landlord claimed that the tenant had not given up its premises with vacant possession.
In the Riverside Park case, the tenant argued that:
- the partitions were fixtures and therefore formed part of the premises (and so were not its responsibility to remove as a tenant chattel);
- the presence of the partitions did not impede the landlord’s use of the premises and vacant possession was therefore given.
In the Secretary of State case, the tenant argued that:
- the items that it had left behind were readily movable and did not prejudice the landlord’s ability to retake possession of the premises; and
- the partitions were items for reinstatement as part of a dilapidations claim.
The court found in favour of the landlord in both instances.
In Riverside Park, the court ruled that the partitions were tenant’s chattels - they could be removed without damaging the premises and their installation was for the tenant’s benefit, rather than a permanent enhancement or improvement to the premises.
Having established that the partitions were chattels, did they prejudice vacant possession? The court ruled that the test to be applied was the significance of the impediment they created. Here, effective marketing of the space would be best-achieved as open-plan and not subject to the myriad of rooms that the partitions created.
In the Secretary of State case, the court held that the tenant had not done anything to demonstrate “to the outside world” that it had vacated the premises. It had not communicated with the landlord in respect of a handover meeting and consequently (when assessed in conjunction with the items that it had left behind and, in the case of the keys, retained) its actions constituted abandonment rather than yielding up the premises with vacant possession. By storing items at the premises it was, the court held, in practice continuing to use the premises.
The tenants had not therefore successfully demonstrated vacant possession and their breaks were ineffective, leaving them liable to continue paying rent and otherwise comply with the tenant covenants in their leases.
Both cases offer helpful guidance on the standards a tenant will need to meet if it needs to provide vacant possession as a condition of exercising its break notice. Given the consequences of non-compliance a tenant should consider, well in advance of the break date, what it should do to ensure that it leaves the premises as it needs to and successfully breaks the lease.
Where, as a tenant, you are negotiating a break clause on a new lease, you should vehemently resist the inclusion of vacant possession as a condition of exercise. Opt instead for an obligation to yield-up the premises free of rights of occupation of third parties and leave disputes (and if applicable compensation) relating to the condition of the premises for a dilapidations claim.