A legal case that took vacant possession a step too far…

During these difficult times many tenants have found themselves in the position of wanting to divest themselves of surplus property, to reduce rental commitments by ending a lease agreement before it full term has expired.

Perhaps the only way of doing this from the tenant’s perspective is by exercising a break clause, if there is such a provision in the lease. It is very common that leases have these provisions, but tenants should be aware that the more favourable these clauses to them may be, the higher the rental valuation also may be.

Conversely most commercial landlords will want to resist the ending of the lease thereby, “letting their tenant off the hook”. This is because they will become liable for all vacant costs, business rates, increased insurance costs and utilities charges, at a time when it may often be difficult to find another willing tenant.

The break clause

Break clauses are common in most fixed-term commercial leases, allowing tenants and landlords to bring a lease to an end early on specific dates. However, these processes are often fraught with difficulties as often the break conditions are not straightforward. Examples of general conditions might be to offer up the property with vacant possession having complied with the terms of the lease, rent payments being up-to-date a principle condition here.

However, there are often other specific conditions to be met and the wording in the lease can often be open to interpretation on this, leading to legal disputes. Such was the situation with Capitol Park.

Here the tenant in Capitol Park Leeds plc v Global Radio Services Ltd [2020] tried to exercise a break clause. This High Court case revolved around the interpretation of whether a break clause condition requiring ‘vacant possession of the premises’ had been complied with.

The lease had a further 8 years to run and no doubt the landlord was reluctant to take back possession. As in most legal cases involving commercial lease break clauses, it turned on whether a break clause condition had been complied with or not, and by implication whether the lease was truly at an end or still continuing.

Notice is served

Global had correctly served notice on the landlord to exercise the break, as per the lease, which stated that the break was conditional on the tenant giving ‘vacant possession of the premises to the landlord on the break date’.

The said premises included the original building on the land and in addition, “all fixtures and fittings at the premises whenever fixed”, excepting the tenant’s trade fittings and all additions and improvements made to the premises.

However, Global had stripped out not just their own fittings. It had also removed many of the landlord’s fixtures including such items as ceiling tiles and grids, lighting, window sills, floor coverings, finishes and pipework, leaving what was effectively an empty shell.

In addition, a dilapidations survey revealed a considerable amount of work needed to replace a broken heating system and boilers, and air conditioning repairs which the tenant had failed to deal with, but had unsuccessfully tried to negotiate a cash settlement with the landlord.

The landlord, Capitol challenged the validity of the tenant’s exercise of the break clause arguing that the gross removal of the fixtures and fittings meant that the tenant Global had not given them vacant possession of the premises.

The High Court’s interpretation

The Court had to first determine the true meaning of the term ‘vacant possession’ in relation to a commercial lease. Most references to previous cases the court could rely on involved tenants leaving items behind when offering up the premises, as opposed to, in this case, having too many things taken away.

The landlord had produced for the court comprehensive evidence of the ‘undesirable outcomes’ the tenant’s actions would cause, including business interruption, damage to the premises and safety issues involving breaches of statutory regulations.

The judge decided that the landlord, through the precise wording of the lease, had taken measures to guard against these undesirable outcomes. With the inclusion of words relating to the fixtures and fittings and all additions and improvements, the landlord had sought to ensure that a tenant exercising the break clause could not do so by handing back a dysfunctional and un-tenantable empty shell.

The judge decided that the tenant had handed back considerably less than ‘the premises’ as defined by the wording of the lease and therefore that the ‘vacant possession of the premises’ condition had not been met.

The judge concluded that the state of the property was “an impediment which substantially prevents or interferes with the enjoyment of the right of possession of a substantial part of the property” and therefore the lease “had not been broken and was therefore continuing.”

Permission to appeal to the Court of Appeal has been granted in this 2020 case, so watch this space.

The lessons:

The wording of a commercial lease is critical when it comes to break clauses as the courts will interpret these leases quite literally, without undue attention to what could have been or is obviously the intentions of the parties.

In Mannai Investment v Eagle Star [1997], Lord Hoffmann had famously said and set the tone on this:

“if the [termination] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate.”

In stating this the judge painted a very vivid picture of the need for strict compliance with contractual break conditions and provisions. More recent case law has reaffirmed this strict approach that judges will take.

If disputes are to be avoided, both tenants and landlords should pay particular attention to the wording of these break clauses, and ideally seek competent professional advice, when leases are being signed.

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