TOO VACANT TO BE EMPTY?

23 / 09 / 2021

In the June issue of Quarterly In Advance, we included an article on vacant possession  Too much and not enough – Wedlake Bell in the context of break clauses in leases, which summarised the facts and outcomes of a number of recent cases.  This issue is important because any pre-conditions to the break, such as providing vacant possession, must be strictly complied with if the break is to be successful. Since our last article the Court of Appeal has overturned one of the cases we covered. The Court’s decision has interesting implications for anyone trying to break a lease – or trying to prevent a tenant from doing so.

In Capitol Park Leeds plc v Global Radio Services Ltd [2021] EWCA Civ 995 the lease had a break clause conditional on the tenant giving vacant possession to the landlord on the break date.  The tenant served its break notice and started removing its fit out.

As part of the reinstatement, the tenant removed not only the partitioning but also the ceiling tiles, an outdated heating system and other fixtures.  The work was then stopped unilaterally in the hope of negotiating a dilapidations settlement with the landlord . Of course it would be commercial madness to replace outdated apparatus with something equally outdated, only for it to be ripped out by the new tenant. However, no settlement was agreed and by the time those negotiations broke down, the tenant was out of time to actually do the work itself.

By this stage, the tenant had removed so much that the landlord couldn’t use the property and the first instance judge held that the tenant had not provided vacant possession and therefore the break had failed.  The tenant had removed items which were part of the “premises”, as defined in the lease, and so could not hand back the “premises”.

At the Court of Appeal, the decision considered vacant possession in the context of whether the landlord was recovering the premises free of things (chattels), people and legal interests. By “legal interests” the law means interests like sub-tenants. There’s no vacant possession if premises are being occupied by someone with a legal right to exclude all others.  The tenant in the Global Radio case had certainly given back its premises without things, people or legal interests.

The appeal judges contrasted the legal meaning of vacant possession with the yield up obligation in the lease. The yielding up covenant required a state of repair condition and decoration consistent with the proper performance of the tenant’s covenants, ie in good repair.  The judges commented that the  break clause could have included a condition that the tenant had complied with its repair obligations but did not. (As an aside, one reason for this might be that such a pre-condition makes it almost impossible for a tenant to break a lease successfully and therefore it is not good practice to include it).  Furthermore, if the building had been destroyed by fire between the date the break notice was served and the date the break notice expired, the logic of the landlord’s argument was the break notice would fail because there were no “premises” to hand back – even though it was the landlord who had to reinstate  the building after a fire.

Termination of the lease did not end the landlord’s right to sue the tenant for damages as a result of its failure to repair. The dire state in which the building was left means those damages may be substantial – but the court was clear that the lease had ended.

What are the implications of this for landlords, tenants, and their advisors?  In a landlord market for letting, we might expect to see more pre-conditions to break clauses which relate to the condition of the building at the end of the lease.  These pre-conditions have not been seen as good practice for many years now: it’s very difficult for parties to be confident that the tenant has “substantially” complied with all the “material” repair covenants in the lease.  Tenants and their advisors should continue to push for the recommendations in the RICS Code for leasing business premises to be followed. The lease Code recommends that the only pre-conditions to a break clause are payment of basic rent, giving up occupation and leaving no subtenants.  One might also hope for more timely settlement of terminal dilapidations payments following a break notice: the landlord could be motivated to collect the money while the tenant was still around.

However, the most important thing to remember is unchanged by this case. Exercising a break clause successfully is not straightforward – plan ahead, and make sure you comply with every single condition.

Key points

  • Conditions in break clauses must be strictly complied with if the break is to be exercised successfully.
  • vacant possession does not refer to physical condition.
  • the landlord still had a remedy for the deficiencies in the building.