The last MSCI Lease Events Review found that in 2019 nearly 50% of office lease break options were exercised, on a rent-weighted basis. What’s more, nearly 60% of office rental income is tied to leases that expire, or have a break-clause date, within the next five years. The tension between landlord desire for secure income, and tenant requirement for flexibility on premises means break clauses will scrutinised as never before.
In order to exercise a break successfully, the tenant (and at the moment, it’s always the tenant) needs to comply with any pre-conditions to the break right. If the conditions aren’t complied with, the lease will continue. The most common conditions relate to payment of rent and vacant possession. A requirement that all rents, or at the very least, the main or yearly rent is paid is a fair and reasonable one. It’s adding insult to injury for the landlord if the tenant leaves empty premises to fill and a pile of rent arrears.
However, the vacant possession argument is more nuanced, because it can be surprisingly challenging to tell if premises are handed back with vacant possession. And let’s not beat about the bush here: by “more nuanced”, I mean an absolute elephant trap for the unwary. For example, if a solitary filing cabinet is left behind after a break date, has the landlord got vacant possession?
There are two tests of vacant possession. Are the tenant’s own things, which are still in use, left at the property? Does what’s left behind interfere with the landlord using the property? When you ask two questions, the answers to those questions might well be different, so it’s no surprise that the case law provides a collection of cautionary tales.
A tenant who arranged for two workmen to carry on working for five days after the break so that an empty warehouse was handed back in tip top condition was still using the property for dilapidations: the break clause failed. Tenants might well feel that dilapidations works are for the landlord’s benefit, not their own. However this tenant decided the work would be cheaper if they did it themselves, rather than getting a bill from the landlord later, so the court held that the tenant had carried on using the premises for their own purpose and therefore not given vacant possession.
A tenant who’d put up partitioned offices and left them there at the end of the lease had erected the offices to benefit the tenant, and these did not improve the building. This meant there was no vacant possession. Although that may seem somewhat hard on the tenant, the judge described the partitioning as a “rabbit warren” and felt that a new tenant wouldn’t want such a maze when they moved in. You might wonder why this work couldn’t be picked up in a terminal dilapidations settlement: well indeed it could, but only if the landlord was prepared to accept the break notice. Remember that conditions have to be complied with, and if you don’t do that, the landlord has complete discretion.
And the filing cabinet? If it’s full of confidential medical records, it can’t have been abandoned by mistake. The tenant must have left it there intending to come back, so no vacant possession.
When working this through, the best advice is remember to look at the landlord’s perspective as well as the tenant’s one. Those two legal tests consider the vacant possession test from both sides.
KEY POINTS
- Tenants are making much more use of break clauses than previously
- Make sure any conditions are complied with, no matter how trivial
- Vacant possession is a complex area