Leave it as you found it! When vacant possession is too vacant

The High Court has held that removing too much can be just as fatal as removing too little when it comes to exercising break clauses requiring vacant possession.

Break clauses in leases can contain a minefield of potential pitfalls dressed as ‘pre-conditions’ for the exercise of the break option. The courts have typically construed pre-conditions strictly and tenants must ensure absolute compliance to avoid the break being invalidated. A recent case focuses on a pre-condition requiring vacant possession to be given by the break date.

Facts

In 2002 Real Radio (Yorkshire) Limited was granted a 24-year lease of a commercial unit on an industrial park, which it converted into a broadcasting studio. In June 2014, Global Radio Services (the Tenant) took an assignment of the lease.

The lease contained a break clause allowing the Tenant to terminate the lease subject to the fulfilment of various pre-conditions, including that it “Gives vacant possession of the Premises to the Landlord on the relevant Tenant's Break Date.”

On 15 February 2017 the Tenant gave notice to Capitol Park Leeds Plc (the Landlord) to terminate the lease on 12 November 2017 (the Break Date).

Between service of the notice and the Break Date, the Landlord served a schedule of dilapidations and the parties’ respective surveyors met several times to discuss works and negotiate a potential financial settlement in lieu of works.  The Tenant also undertook substantial works to the premises. Following an inspection of the premises by the Landlord’s surveyor on 1 September, the Landlord’s solicitors wrote to the Tenant to remind it of its obligation to deliver up vacant possession and to remove all alterations, additions and improvements made to the premises. No settlement was agreed and the Tenant ran out of time for completing the works.

The Tenant later returned the keys to the Landlord on the Break Date.

The Dispute

The Landlord argued that the Tenant had not complied with the pre-condition to give vacant possession of the “Premises” as defined in the lease, that it had not successfully exercised the break option, and that the lease was continuing. The Landlord sought a declaration accordingly. The Tenant argued that it had complied with the pre-condition to give vacant possession.

It was common ground that the premises had been stripped of all the Tenant's fixtures but that it was handed back minus seventeen original fittings, ranging from ceiling tiles to a smoke detection system.

The Landlord argued that the definition of “the Premises” included both: (a) the existing building which was there when the lease was granted; and (b) all fixtures and fittings at the Premises whenever fixed (save for Tenant’s fixtures).

The Tenant asserted that the concept of vacant possession was uncomplicated, meaning to give possession of the premises vacant of people, chattels, and interests. In addition, the definition of the “Premises” was intended to refer to the Premises as they were from time to time. It said those words are to be interpreted in an “always speaking” sense by reference to what is on the demised land at any particular point in time.

Accordingly, the Tenant said it had complied with its obligations. Specifically, the break condition did not require the Tenant to give vacant possession “in a state of repair, condition and decoration which is consistent with the proper performance of the Tenant's covenants in the Lease”, but simply required the Tenant to “give vacant possession of the Premises to the Landlord on the relevant Tenant's Break Date”.

Although numerous cases were referred to, both parties accepted that none of these dealt with a situation where a tenant had left premises empty but devoid of essential fixtures and fittings.

Decision

The judge found for the Landlord and held that the break was not effective.

The judge decided that by defining the “Premises” in the lease to include the words “all fixtures and fittings at the Premises whenever fixed (except Tenant’s fixtures)” and “all additions and improvements made to the Premises”, the Landlord was ensuring that a tenant exercising its break option could not do so by handing back an empty shell of a building which was dysfunctional and unoccupiable.

As the Tenant had ceased works and failed to reinstate the seventeen original features by the Break Date, it had not given back “the Premises”. The physical condition of the premises was such that there was a substantial impediment to the Landlord’s use of the premises and the Tenant had therefore failed to give vacant possession.

Comment

This case yet again highlights the difficulties faced by tenants when seeking to comply with pre-conditions in break clauses. In particular, it confirms that giving vacant possession does not just mean ensuring premises are empty, but that taking too much can be just as fatal as taking too little. However, it may not be the end of the story as the Tenant has been given permission to appeal.

Parties should ensure that the terms of leases are carefully reviewed both when agreeing the lease document and prior to the exercise of a break clause, so they both know exactly what any pre-conditions mean and require.

Capitol Park Leeds Plc v Global Radio Services [2020] EWHC 2750