Fixtures or chattels? Implications for tenants with break clauses requiring vacant possession

A tenant’s break option was subject to a pre-condition requiring vacant possession. The High Court has held (Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch)) that demountable partitioning installed by a tenant was a chattel and the tenant’s failure to remove it meant that the pre-condition had not been satisfied. As a result the tenant’s purported exercise of the break clause was ineffective and the term of the lease continued.

Background

The parties had entered into a ten year lease of premises which included a break clause entitling the tenant to terminate the lease on the fifth anniversary of the term commencement date subject to the tenant serving at least six months’ notice on the landlord. The break clause also provided that any notice exercising the break would only be effective to determine the lease if the tenant gave vacant possession of the premises to the landlord on or before the break date. The tenant served notice to exercise the break option in accordance with the break clause but on the break date left the premises with various works, which it had carried out, still in place. The works included a large amount of partitioning, kitchen units, floor coverings, window blinds, an intruder alarm and water standpipes within a large meeting room.

The arguments

The landlord claimed that the works were chattels and therefore their presence in the premises after the break date resulted in a failure by the tenant to yield up the premises with vacant possession. Accordingly the notice purporting to exercise the break was ineffective.

The tenant contended that the works were tenant’s fixtures and fittings, which either by proper operation of the law and/or proper construction of the lease and licence for alterations formed part of the premises. If the works formed part of the premises and there was no obligation to remove them then their presence could not be an impediment to vacant possession of the premises.

As a secondary argument, whether or not the works were tenant’s fixtures and fittings, the landlord claimed that the tenant had an obligation to remove them because the premises were specifically defined in the lease as excluding tenant’s fixtures and fittings. The tenant was of the view that there was no obligation to remove the works.

Outcome

The first question to be considered was whether the works could properly be considered to be chattels or tenant’s fixtures and fittings. The judge reached the conclusion that the works were chattels and therefore did not form part of the premises. He recognised that, although the partitioning was “slightly attached” to the premises, there was authority to say that “the object and purpose of the annexation” was more decisive. In this case the configuration of the partitioning was unique and the judge was persuaded that the object of the configuration “was to benefit the tenant rather than affording a lasting improvement to the premises.” The judge did not consider the other works in detail as he questioned whether the other works alone would be enough to frustrate “vacant possession” but he did conclude that the other works were also chattels.

The judge then went on to consider what was meant by the term “vacant possession”. The judge applied the test set out in the leading case of Cumberland Consolidated Holdings Ltd v Ireland ([1946] K.B. 264) and was satisfied that the partitioning was “an impediment which substantially prevents or interferes with the right of possession”. Accordingly, he found that vacant possession had not been given by the tenant on the break date.

Other points

The judge recognised that his conclusion was drawn on the basis that the works were chattels and as such did not form part of the premises. As an aside he went on to consider the position had the works been tenant’s fixtures. The premises were defined as specifically including all additions and improvements to the premises and all fixtures and fittings of every kind, but excluding tenant’s fixtures. Therefore, the judge concluded that the existence of any tenant’s fixtures at the break date would mean that vacant possession of the premises had not been given.

The judge also considered the terms of the licence for alterations under which the works were installed and whether there was an obligation in that document to remove the works. The judge found that such an obligation had arisen (because the tenant had materially breached the terms of the licence and it stated that, in such circumstances, it would cease to have effect and the tenant would have to remove the works) so the continued presence of the works at the break date meant that vacant possession had not been given.

Comment

This case provides useful guidance to tenants seeking to exercise break clauses where the terms of the break clause contain a condition requiring vacant possession of the premises. Tenants should be aware that, even if there is no obligation in the lease to remove/reinstate works, if the works are chattels, or tenant’s fixtures which form part of the premises by virtue of the construction of the lease, failure to remove such works by the break date may frustrate the operation of the break clause, meaning that the lease term will continue.

The case also highlights the importance for tenants (and their solicitors) to be wary of “vacant possession” obligations, particularly in break clauses. The use of this wording is not compliant with the Lease Code 2007, which states that disputes about the state of the premises, or what has been left behind or removed, should be settled later, as is the case on normal lease expiry. Instead, it is recommended, and widely accepted, that the only conditions to the exercise of a break option should be that the tenant is up to date with rent, gives up occupation of the premises and leaves behind no continuing subleases.