Break clause: removing 'too much' not fatal to vacant possession after all

Last week’s Court of Appeal decision in Capitol Park Leeds plc and another v Global Radio Services Ltd has provided welcome clarification for landlords and tenants alike as to the meaning of vacant possession in break conditions.

Earlier this year the High Court found in favour of the landlord in finding that by removing too much from the premises, the tenant had not given vacant possession. As this was a condition to the break right they had exercised, the lease continued.  The Court of Appeal has now reversed this decision on appeal.

Background

The case involves premises at 1 Sterling Court in Leeds. The tenant had acquired the lease of the premises through a corporate acquisition. The premises were surplus to requirement and the tenant decided to exercise the break right to terminate the lease on 12 November 2017. One of the break conditions was to give vacant possession of the premises.

The tenant proceeded to remove a number of items before the break date. These included ceiling tiles, boxing to columns, floor finishes, window sills, fan coil units, radiators, heating pipework, to name a few. Evidence showed that these items were part of the building itself or otherwise landlord fixtures. The tenant had had no right to remove these.

The landlord argued that the tenant had failed to give vacant possession as it was left with less than the premises as defined in the lease. 

High Court decision

The High Court sided with the landlord. On the basis that the physical condition of the premises was such that there was a substantial impediment to the landlord’s use of (a substantial part of) the premises, the tenant had not given vacant possession. Consequently, the break conditions had not been met and the lease continued.

Court of Appeal decision

The Court of Appeal allowed the tenant’s appeal.

The only question for the Court of Appeal to consider was whether the tenant’s removal of the landlord’s items meant that it did not give vacant possession of the premises.

The landlord argued that as the tenant must give back the “Premises” as defined, this must include all such things that make up the “Premises” such as landlord fixtures.

The tenant, on the other hand, contended that the vacant possession condition is not concerned with the physical state of the premises, but with whether the landlord is receiving the premises free from things, people and interests. The reference to “Premises” within the vacant possession condition must be interpreted as those premises from time to time.

The Court of Appeal agreed with the tenant. It held that what is required to return vacant possession involved giving back the premises free of “people, chattels, and interests”.  It does not refer to its physical condition. The break condition had therefore been complied with and the lease had terminated on 12 November 2017. The fact that the premises may have been left in a dire state did not preclude the valid exercise of the break right. The correct course of action for the landlord is a claim for damages against the tenant for removing items it ought not to have removed, but the break condition was unaffected.

A brief summary of the Court of Appeal’s reasoning:

• The break condition did not require the tenant to have observed and performed the covenants in the lease. This was in contrast to the yielding up clause which required the premises to be handed over with vacant possession in a state of repair consistent with the performance of the tenant covenants. The fact that the break condition did not have this additional requirement supported the tenant’s argument about the break condition not being concerned about the physical state.

• The landlord’s argument about the tenant being required to hand back the “Premises” in their entirety could have unintended consequences. For example, it would mean that if the premises were destroyed by fire, the tenant would not be able to hand them back and therefore would not be able to exercise the break.

• If handing back the premises with vacant possession meant the same in the break clause as it did in the yielding up clause, as the landlord argued, the lease would be internally inconsistent. This would mean that handing over premises with insured damage (excluded from the tenant’s repairing obligation) would breach the yielding up obligation, which would make no sense.

• The tenant’s approach of the break condition did not leave the landlord without a remedy. Termination of the lease was expressed to be without prejudice to any right of action for any previous breach. It was therefore open to the landlord to claim compensation for failure to comply with, say, the repairing obligation.

• What comprises the “Premises” is not fixed at the point the lease is concluded. The definition of the “Premises” included “all fixtures and fittings at the Premises whenever fixed” meaning the “Premises” are as they are from time to time.

• The fact that break conditions must be strictly complied with, does not mean that the clause itself must be construed strictly or in favour of the landlord.

What next

In the context of giving vacant possession, disputes normally focus on tenants having removed too little. The High Court decision in this case left tenants walking the tightrope between ‘too little’ and ‘too much’. Tenants will be relieved that removing too much is not fatal to a vacant possession break condition.  Clearly tenants still need to be mindful of any landlord claims resulting from removing landlord fixtures. Equally the Court of Appeal decision has provided certainty to landlords in judging as to whether or not vacant possession has been given.

Market practice has moved on over the last number of years and it is now more commonplace for a break condition such as this to prescribe exactly what is required. However, older leases are likely still to include blanket vacant possession break conditions. This is therefore something that is still very relevant.

TLT’s transactional and dispute resolution real estate lawyers are experienced in the full range of landlord and tenant matters. If you would like to discuss your requirements, please get in touch.