We have posted previously on the difficulties of operating break clauses effectively . Today the Court of Appeal (in a case where we were acting for the landlord) has considered the meaning of a break clause which was conditional on the tenant delivering up with vacant possession.

There are still a number of leases in existence which contain a contractual right for a tenant to break its lease as long as a number of different pre-conditions are met. These break clauses are extremely difficult for tenants to manage effectively. The leases in question often date back to a time when the landlords had all the bargaining power and tenants were too willing and signed up to onerous terms. The most recent litigation on a conditional break clause, NYK Logistics -v- Ibrend Estates actually contained a much fairer break clause but one which the tenant still failed to effect.

In today’s case, NYK Logistics were the tenant, they served their break notice and then spent time repairing and reinstating the premises to avoid a claim for dilapidations from the Landlord after the break date.

The tenant’s difficulty was that it had not finished its works and it stayed in possession and control of the premises after the break date. In the last week of the term there had been inconclusive negotiations for an extension of time to finish the dilapidations works. On the break date the tenant did not return the keys to the landlord, kept site security in place and the Court of Appeal found that it took no actions that were consistent with delivering up the premises with vacant possession.

The tenant believed it could rely on the fact that the landlord had waived the breach of the obligation to deliver up vacant possession but the landlord had not done so and had not intended to do so. Waiver is a difficult point to prove.

For those who like the technicalities, whether properties are delivered up with vacant possession is still a two part test –

  • Was the person who was required to give vacant possession still actually using the property for his own purposes?
  • Is the physical condition of the property in such a state that there is no substantial impediment to use of the property (or a substantial part of it) by the person taking the property? Physical impediments only become vacant possession issues in exceptional circumstances. This was not the situation in the Ibrend case.

The lessons to be learnt -

  • Tenants cannot expect landlords to help them satisfy the pre-conditions of any break clause; they must be prepared to stand alone and set up all the evidence possible to show that they have complied with the lease and delivered up vacant possession.
  • Even if a lease does not say it (although most do), vacant possession is required when a lease term comes to an end on the exercise of break rights.
  • Waiver is a difficult concept both to understand and to prove.  We find it is often misunderstood, as was the case here.

Landlords will be relieved that this decision has gone in their favour.