Problems with partitioning when exercising a break clause
Break clauses are one of the most frequent causes of disputes between landlords and tenants. Depending on the specific drafting of the break clause when it was originally negotiated, a tenant could give its break notice expecting that its lease will come to an end automatically on the break date only to find that its break has not worked because it failed to comply with a condition of the break.
If there are conditions attached to the exercise of the break clause, these must be strictly complied with. If not, they will prevent the break clause from taking effect and the lease will simply continue. One condition which is often imposed is that the tenant must give up vacant possession. In a recent case, Riverside Park Ltd v NHS Property Services Ltd, the High Court considered what this meant.
What does vacant possession mean?
The case law is clear that vacant possession is not given where there is an impediment that substantially prevents or interferes with the landlord exercising its right of possession to a substantial part of the property. This could be a physical interference such as the tenant's possessions (chattels) still within the premises, or even piles of rubbish. It could also be because people are in the premises, either legally as they have an underlease or licence which entitles them to be there or because they are trespassing as in the case of squatters.
The classic risk to the tenant is that it does not realise that people are still in the premises. In the case NYK Logistics (UK) Ltd v Ibrend Estates BV, the tenant had not cancelled the visits of its security guard so they were still attending for periods following the break date and there were also workmen in the premises trying to finish off repairs. The tenant had failed to ensure that there was no one left at the property and so it had not given vacant possession and its break had failed.
Partitioning left on the premises
In Riverside Park, the tenant had taken a lease of premises in an open plan state. In the usual way, it carried out various works to fit out the premises in accordance with its requirements including installation of partitions.
The landlord argued that vacant possession had not been given because the partitioning had been left.
The tenant argued that the partitioning was actually not a chattel (not forming part of the premises) but instead tenant's fixtures which were sufficiently annexed and attached to the premises that they became a part of it. There was therefore no obligation to remove them in order to give vacant possession as they were actually part of the premises.
The tenant also argued in the alternative that if the partitions were actually chattels then leaving them in the premises did not stop vacant possession being given because they did not substantially prevent or interfere with the landlord's enjoyment of the premises.
The High Court ruled that on the facts of the case the partitions were chattels because they were demountable partitions. Though the partitions were fixed to the raised floor and the suspended ceiling the Court found that they could be removed without causing damage to the premises. The partitions were being used to divide the space up into a series of small offices. The Court decided that the partitioning was not a lasting improvement to the premises but was just something to suit the tenant operationally.
As chattels, given that they were all over the premises, it was unsurprising that the Court found in favour of the landlord that they did form a substantial impediment to the landlord exercising its right of possession. Vacant possession had not been given by the tenant, so it had not satisfied the condition in the break clause and the break clause had not operated.
The Court then went on to say that even if it was wrong and the partitions were actually tenant's fixtures then on the particular definition of premises in the tenant's lease, tenant's fixtures were excluded from the definition so they had not become part of the premises. Somewhat surprisingly the Court also said that even if the partitioning had become part of the premises, because on the facts the partitions were unapproved works not authorised by a licence for alterations, leaving them in the premises on the break date meant that vacant possession had not been given.
Tips for landlords and tenants
Although this case was only a High Court decision and turned on very specific facts, it is of interest as landlords may be able to use the argument that partitions which are easily demountable are chattels. In the event that they are left by a tenant where a break clause is conditional on vacant possession, this would mean that their presence will mean the tenant has not successfully broken the lease.
From a tenant's perspective, the case is a reminder that they must look carefully at the wording of their break clauses well in advance of seeking to exercise them so that they can establish what exactly they need to do, possibly even speaking to the landlord and seeking to negotiate a schedule for what needs to be stripped out.
In fact, tenants who are well advised should when negotiating break clauses seek to ensure that vacant possession is not a condition of the break – it is just too risky. The Code for Leasing Business Premises 2007 recommends that the condition should instead be watered down so that it refers instead to the tenant giving up occupation and leaving behind no continuing sub-leases. The idea is that as long as the tenant has left and there are no other legal occupiers then the break would still work, leaving any questions as to belongings and rubbish as part of the dilapidations claim rather than stopping the break from operating.