Vacant possession and break clauses

“No” was the Court of Appeal’s view on the facts of a recent case. The decision saw it overturn a decision of the High Court, which found that a tenant had not validly exercised its break right in relation to a broadcasting studio because it had stripped out too much of the property to satisfy a break condition requiring “vacant possession of the Premises”. The Court of Appeal found that the three key elements for giving vacant possession are that the property is free of things, people and interests and in this case the tenant had satisfied these requirements.

The tenant had been part way through extensive reinstatement works to comply with its yielding up obligations under the lease when it had downed tools to try to reach a negotiated settlement with the landlord. It had stripped out key items including ceiling grids and tiles, floor finishes and air conditioning, ventilation, heating, fire prevention, power and lighting systems. By the time it became clear that negotiations had failed, there was not enough time for the tenant to complete its works and at the break date the property was an empty shell that was “dysfunctional and unoccupiable”.

There was a single issue before the Court of Appeal: did removal of all these items prevent the tenant from giving vacant possession of the premises to the landlord? It was essentially a matter of construction.

The landlord argued that because the tenant had removed so much of what was defined in the lease as forming part of the ‘Premises’ (which included landlord’s fixtures) it did not hand back the ‘Premises’ with vacant possession as required by the break clause. The landlord’s position was that the ‘Premises’ to be handed back were “the building which was in existence when the Lease was granted” together with the fixtures and fittings.

However, the Court of Appeal agreed with the tenant and found that an obligation to give vacant possession “refers to giving back the property in question free of people, chattels, and interests, not to its physical condition”. The break option had therefore been successfully operated as the tenant had complied with these requirements. The Court favoured the tenant’s view that “the Premises” should be understood to refer to “the Premises as they are from time to time”.

In support of its findings the Court noted that:

• the break clause could have been, but was not, drafted as being conditional on the tenant having complied with its lease covenants (this is something that is generally regarded as rendering a break inoperable due to the difficulty in delivering full compliance with the repairing obligations);
• to have adopted the landlord’s interpretation of the definition of “the Premises” would also have had consequences for other provisions in the lease such as the insurance and yielding up provisions and rendered it internally inconsistent;
• the landlord had a separate remedy for any disrepair, which it was free to pursue; and
• just because the conditions prescribed in a break clause must be strictly complied with, it does not follow that those conditions should be interpreted so as to favour the landlord.

Tenants will be relieved by this decision and in particular the judge’s view that strict compliance with break conditions does not mean that such provisions must be construed against the tenant. The landlord had a remedy in relation to the state in which the building was handed back and this was not, in the absence of express drafting in the break clause dealing with this, to keep the tenant on the hook for the remainder of the term of the lease.

However, the decision was also focused on an unusual set of facts and complying with a break condition that requires vacant possession will still present a tenant with challenges, particularly when it comes to the removal of chattels such as partitioning.

Capitol Park Leeds Plc & Anor v Global Radio Services Ltd [2021] EWCA Civ 995