The facts

Global Radio Services, (‘the Tenant) served a break notice on Capitol Park Leeds PLC (‘the Landlord’) in accordance with a break clause contained within its lease.

The break was conditional on Global giving ‘vacant possession’ of the premises at the break date. The lease defined ‘the Premises’ as including the building, the fixtures and fittings belonging to the landlord and all additions and improvements.

The break notice was served on 15 February 2017 and the break date was 12 November 2017.

After the break notice had been served, the parties and their agents entered discussions regarding the dilapidations. As part of this process and the connected remedial works, the Tenant arranged for the removal of fixtures including but not limited to tiles, lighting, window sills, pipework connections and ventilation.

The Tenant then halted the remedial works before they reached a state of completion and went on to vacate the Premises, leaving the Landlord with the Premises in a shell-like state; not at all reflective of the state they were in when the Tenant went into possession.

The Landlord argued that the break was invalid as vacant possession had not been given on the basis that the Premises, by its definition in the lease, were not being delivered up. The Tenant argued to the contrary.

The High Court Judgment

The High Court rejected the Tenant’s arguments and held that it had not complied with the requirement to give vacant possession and as such the break was invalid. The Tenant had handed back the Premises in an empty, shell-like state which was dysfunctional and could not be occupied. The Tenant appealed the decision to the Court of Appeal.

The Court of Appeal Judgment

The Court of Appeal overturned the decision of the High Court. The Court held that vacant possession is conditional on tenants handing properties back free from people, chattels and legal interests rather then being focussed on the physical condition of the property.

It was deemed somewhat irrelevant that fixtures and fittings belonging to the Landlord had been removed and not replaced given that the lease afforded the Landlord to right to pursue the Tenant separately for compensation for failure to adhere to its repairing covenant.

The Court of Appeal also noted that in this particular lease, the break clause was not expressed to be conditional on the tenant having observed and performed any covenants in the lease, including any repairing obligations.

What does the Judgment mean?

The decision will serve as welcome relief to tenants looking to comply with conditions to hand back vacant possession of properties or those in the process of negotiating the terms of break clauses, particularly in the current economic climate where an increasing number of breaks are being exercised and negotiated.

The decision will however serve as a word of warning to landlords. Careful consideration should be given the drafting of the break conditions. Applying the principles from the Court of Appeal’s judgment, a break clause should expressly state that it is operational upon a tenant having complied with other covenants contained within the lease (i.e. a repairing covenant) should that be the wishes of the landlord. Failure to include such conditions may leave a landlord being handed back a property which is far from useable. That said in the current market, breaks conditional upon material compliance with all covenants or the like will be very few and far between.

Key contact: Jessica Dickinson | jld@gosschalks.co.uk | Tel: 01482 324252