20/07/2021
Commercial leases will often give the tenant a right to terminate its lease early by including an option to break during the term. Invariably, the right can only be exercised when the tenant has complied with a number of pre-conditions and one of the most common (and contentious) conditions is to hand back the premises with vacant possession. But what happens when the tenant removes too much of the premises, including landlord’s fixtures - would this prevent the break from happening even though the property was vacant?
This unusual point was considered recently by the Court of Appeal in Capitol Park Leeds plc v Global Radio Services Ltd [2021] which involved a property that was literally stripped bare before being handed back to its landlord. We covered the original High Court case in May’s Property Focus here, so in this alert we will look at why the decision was reversed and what this means for landlords and tenants.
Background
Global Radio Services Ltd (Global) had the benefit of a break right provided it gave vacant possession of the “Premises” as defined in the lease. This definition included the original building, landlord’s fixtures and all additions and improvements. Global served a break notice on its landlord, Capitol Park Leeds plc (Capitol) and then set about stripping the property back to a shell.
Global had intended to replace many of the fittings before finally moving out, but when negotiations with Capitol to settle outstanding liabilities and surrender the lease fell through, Global handed back the property in what the High Court described as a “dysfunctional state”. The court held that the pre-condition for vacant possession had not been satisfied as Global had gone too far by returning a property which could not be used by Capitol unless it was substantially reinstated.
This meant that Global’s lease did not terminate on 12 November 2017 but would now continue until 11 November 2025. Global appealed to the Court of Appeal.
Court of Appeal
The focus of the appeal was in relation to the specific drafting of the break clause and whether removing fixtures and fittings to this extent meant that the property had not been handed back with vacant possession.
The key clause provided that Global could break the lease if it “gives vacant possession of the Premises to the Landlord on the relevant Tenant’s Break Date” and the parties each put forward differing views on how that should be interpreted:
- Capitol argued that the reference to “Premises” meant that the property had to be returned as per the definition including the landlord’s fixtures, subject to the replacement of any items pursuant to the covenants in the lease. Instead, Global had removed but not replaced parts of the premises and so was in effect, handing back a different property which was not in accordance with the break clause.
- Global argued that the requirement to give vacant possession did not require an assessment of the physical state of the premises and relied on Sachs International v Procession House Trustee Ltd [2018] which held that to comply with vacant possession, a property should be free of “people, chattels, and interests”. If Capitol had wanted the premises reinstated as a pre-condition of the break, then that should have been included as a specific requirement in the clause.
Decision
The Court of Appeal agreed with Global that the meaning of “vacant possession” did not refer to the physical condition of the premises, but whether the trilogy of “people, chattels, and interests” had been removed. It was agreed that the property had been left in a dire state but that did not preclude the valid exercise of the break clause.
The Court noted that stipulations as to the state and condition of the property are commonly seen in break clauses (so that the break is conditional on the tenant having observed all the covenants) and it was significant that these had not been included. Previous case law had also established that the definition of “Premises” should be interpreted as they exist from time to time.
This was in direct contrast to the “yield up” covenant which required the premises to be handed back in compliance with “the proper performance of the Tenant’s covenants”. In addition, the lease provided that termination under the break was without prejudice to any rights of action in respect of any previous breach of covenant or condition. One of the tenant covenants obliged Global to “keep the Premises in repair”, so this gave Capitol the right to seek compensation under that clause, but did not prevent the break clause from being exercised.
Comment
Tenants will be pleased by this decision because, unless there is specific wording to the contrary, a tenant is only obliged to return the premises in the condition they are in as at the break date. Landlords still retain the ability to take action under other tenant covenants (assuming they have been included) but if they want to link the right to break to the condition of the premises, then that has to be stipulated.
Tenants particularly in the retail and office sectors are reassessing their commercial property requirements due to the impact that the pandemic has had, and so the ability to break is often a lifeline. Landlords who have also been affected will be unwilling to let a tenant leave early as replacing them will not be easy and so will challenge any attempt to exercise a break. This case would have had a different outcome if the break clause had specified the condition of the premises at the time of the break, so careful drafting at the outset is vital. Scrutinising the wording of the break clause is key to success or failure - whichever side of the lease you are on.
If you would like to discuss this topic in more detail, please contact James Teagle, Partner.
