Property Focus May

How “vacant” is vacant possession? The dangers of stripping out too much!

Many tenants in the current pandemic have had no option but to close down their businesses, yet they are still liable for rent and other payments due under their leases.  Where a lease has a break clause, this can provide a lifeline to tenants who need to get rid of unwanted premises.  However, exercising a break clause is not easy due to the stringent conditions often attached to them - landlords are rarely keen to lose a tenant, particularly those with guarantors.  As a result, a tenant seeking to exercise a break clause should expect to have to comply strictly and to the letter with its requirements.

Handing back the premises with vacant possession is a common break condition, and often leads to disputes once the break date has passed – generally because the tenant has either left items or even people, which enables the landlord to successfully resist the tenant’s attempt to break.  But what happens when, in an effort to comply with its obligation to give vacant possession, a tenant removes too much instead of too little?  The High Court was faced with this unusual situation in the case of Capitol Park Leeds plc v Global Radio Services Ltd [2020].

Facts of the case

Capitol Park (C) was the landlord of a property which was leased to Global Radio (G) under a 21 year lease which would expire in 2025.  The lease contained a break clause allowing the tenant to break the lease in 2017, which was conditional on (amongst other things) G giving “vacant possession of the Premises to the Landlord on the relevant Tenant’s Break Date”.  The definition of the “Premises” included the original building and “all fixtures and fittings at the Premises whenever fixed (except the tenant’s fittings)”.

G wanted to end its lease and in preparation for this, set about stripping the property of a variety of items including ceiling grids, tiles, pipework, lighting, and even removing window sills and the floor coverings in the communal areas.  G exercised the break clause by giving written notice to terminate the lease on 12 November 2017.  In the period between service of the break notice and the break notice, discussions and meetings took place between the surveyors for C and G regarding the premises and dilapidations but agreement was not reached and G handed back the keys on the break date.

C applied to the High Court for a declaration that G had failed to break the lease because it had not handed back “the Premises”; what had been returned in reality was an empty shell such that G had not complied with the pre-condition to provide vacant possession.  G’s argument was that although it may be in breach of the repairing covenant (which could be dealt with as part of a dilapidations claim) it had given vacant possession on the correct date and therefore was able to break the lease.

Decision

The High Court looked at the definition of the “Premises” and held that by including drafting which specifically referred to “all fixtures and fittings”, C was protecting itself against the situation which had now arisen.  The judge, who was clearly unimpressed by the state of the property, described it as “dysfunctional and unoccupiable”.

The Court was satisfied that the physical condition of the property was such that this was a considerable impediment to C’s ability to use the property, or a substantial part of it, from the break date onwards.  The Court also took into account the rationale behind the drafting; it was clear that C had given thought to this in relation to the standard expected when the property was returned, which made commercial common sense.  The Court held that G had not validly exercised its break as per the terms of the lease, which would now continue until 2025.

An additional argument by G that there had been an agreement between the parties’ surveyors in June 2017 that G should stop remedial works at the strip-out stage pending negotiations for a financial settlement with C also failed. The Court took the view that there was no clear or convincing evidence of such an agreement ever having been reached that would now prevent C from holding G to the strict requirements of the break clause.

Practical points

Previous reported cases on break clauses and vacant possession have been concerned mainly with situations where too many items have been left behind as opposed to too much having been removed, so it is the first time this particular set of circumstances has been considered.  G has been given permission to appeal to the Court of Appeal and if that happens it will be interesting to see if a different conclusion is reached.

Whatever the outcome of that appeal this case is a reminder that:

• When entering into a lease, a tenant should think carefully before agreeing to a break clause which requires pre-conditions such as giving vacant possession. If the break clause cannot be amended, then the tenant should fully understand what it needs to do to meet those conditions and be prepared to do so.
• Before exercising a break it is important to scrutinise the wording of a lease carefully including key definitions such as “Premises” (as in this case). This applies equally to landlords who may be able to thwart an attempt by a tenant wanting to get out of its lease. There are pitfalls in not removing enough, and this case shows there are also pitfalls in removing too much. As a result, expert legal and surveying advice should be obtained, and at an early stage because time is often the most valuable commodity of all in this type of scenario.
• It is common for settlement negotiations to run alongside an attempt to break a lease. It may well be that it is in the landlord’s interests not to hold the tenant strictly to the break conditions, and that a deal could be negotiated. However, this case is a reminder that unless and until a binding settlement is reached and documented, the tenant remains obliged to comply strictly with the break conditions (no matter how reasonable or sympathetic the landlord may seem). Any such agreements should be formally documented in a form produced with legal input.

Getting a break option wrong can be costly, resulting in the tenant being left paying rent for years on a property it no longer wants or in many cases now, can no longer afford, so taking early legal advice, both on the preparation of the break notice and on the overarching strategy to achieve compliance, is crucial.

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