Break clauses and vacant possession – important Court of Appeal judgement
The tenant may have stripped out the property taking everything from ceiling tiles to smoke alarms but, says the Court of Appeal, it had validly exercised a break clause terminating the lease and the landlord didn't have a leg to stand on.
The high profile case of Capitol Park Leeds v Global Radio Services (2021) brings some long awaited clarity on the operation of conditional break clauses with the Court of Appeal overruling the High Court's previous decision.
In effect, although no-one disagreed that the departing tenant had removed many of the landlord's fixtures and fittings, the Court held that vacant possession is not to do with the physical state of the premises.
Instead, it's about the property being left free of people, things and legal interests when the tenant moves out.
What does vacant possession really mean then?
The term 'vacant possession' has a specific legal meaning which has been disputed in court countless times. In short, it is more complicated than simply moving out.
How to comply with the strict conditions required to serve a valid break clause notice for vacant possession has long been a deceptively complex area of commercial property law.
It is hoped this case will end some of the confusion by clarifying what is meant by a tenant's obligation to give back vacant possession at lease termination.
How do break clauses work in commercial leases?
Break clauses are still relatively common in commercial leases and can be triggered by either landlord or tenant, or both, to end a lease before the agreed term.
For a tenant, it is common for conditions to be attached to how a break clause can be exercised. A landlord will often insist, for example, that a tenant must be up to date with their rent to validly implement one.
Break clause conditions are interpreted absolutely meaning that if a tenant gets something wrong, the break is not triggered hence the lease doesn't end and the tenant continues to be bound for the remainder of its term.
What happened in this case?
Global Radio had been the tenant of a three-storey commercial property in Leeds for 24 years when it served notice to exercise the break clause under the lease in November 2017.
By then it had pretty much stripped out the premises including fire barriers, floor finishes, pipe work and radiators which evidence showed were all part of the landlord's fixtures and fittings.
The High Court agreed with the landlord that the tenant's removal of these many fixtures and fittings resulted in the premises being given back without vacant possession.
However, the tenant argued that vacant possession required returning the premises free of people things and legal interests which it said it had done, despite any additional breach of the repair covenant.
The Court of Appeal agreed, ruling that although the property had been left in a dire state, for which the landlord still has a claim for breach of repair, this did not preclude valid exercise of the break clause.
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