A vacant building does not equal vacant possession
This article was published on: 4th November 2020Matt Pugh
In the current climate, many tenants are turning to their leases in hope that a break clause was agreed. This can provide a lifeline for tenants burdened with rents which are no longer affordable, or premises which are no longer required.
However, break clauses can be deceptively complex. Serving a valid notice which complies with the strict conditions of a break clause is not the simple process of “writing a letter” and there are many stark warnings in the case law on how things can go wrong.
The latest of those warnings comes from Capitol Park Leeds PLC v Global Radio Services Limited PT-2019-LDS-000008, another case which concerned the requirement to give “vacant possession”.
Global Radio Services was the tenant of commercial property in Leeds, pursuant to a 25-year lease expiring in 2025.
The lease contained a tenant break clause permitting the tenant to terminate on 12 November 2017 (the break date), subject to it complying with the following conditions, which are all commonly agreed:
- Providing at least six but no more than nine months’ notice to expire on the break date
- Ensuring rent and all other sums due were paid in full at the date of the notice
- Providing vacant possession of “the Premises” to the landlord on the break date
The “Premises” were defined as including “all fixtures and fittings at the Premises…and all additions and improvements…and any outside parts and signage erected”, subject to various exceptions.
The tenant served notice on 15 February 2017 to expire on the break date. As that date approached, all that remained was for the tenant to return vacant possession on 12 November 2017.
There was a complicating factor – the tenant had, prior to the break date, removed a long list of features and fixtures of the premises, including window sills, radiators, lighting, smoke detection systems and ceiling grids, to name but a few.
An estoppel argument failed, and the Court found that no agreement had been reached for the tenant to make payment in lieu of undertaking repair and reinstatement works. The property was stripped back to a shell and remained so on the date it was returned to the Landlord.
Vacant Possession Requirement
To exercise a valid break notice, vacant possession of the “Premises” was required. The above definition of the Premises resulted in a dispute as to whether returning a property as a shell satisfied that requirement. The opposing positions were:
a. The landlord argued that vacant possession of the “Premises” would mean returning the property in a manner consistent with the above definition and reinstated i.e. including all of the fixtures and fittings, “whenever fixed (except Tenant’s fixtures)”; and
b. The tenant argued that the strip-out and condition of the property was relevant to a dilapidations claim only – for example, a failure to reinstate or yield-up in the required condition. The property was otherwise returned with vacant possession, and the break clause had been complied with.
As is often the case with a break notice dispute, the stakes were very high. An invalid notice would result in the tenant being on the hook until the lease terminated in 2025 – an additional eight years of rental and other obligations than it had hoped to avoid.
The Court was tasked with interpreting the meaning of the break clause and cited the well-known Supreme Court decision of Arnold v Britton (2015) UKSC 36. That case encouraged the interpretation of contracts by reference to the natural meaning of the relevant words, as both parties would have understood them. It discouraged the Courts from implying terms or meaning into clauses where that was unnecessary to make sense of the agreement.
The Court found that the break clause had been drafted to protect a landlord from receiving an empty shell of a building on termination which was “dysfunctional and unoccupiable”. This is what had happened here.
The tenant had, the Court found, stopped work in the hope of negotiating a settlement which was ultimately never reached. It preferred the evidence of the landlord’s expert. The tenant had returned “considerably less” than “the Premises” as defined in the lease and did not give vacant possession. The physical condition of the property resulted in a substantial impediment to the Landlord’s use of it.
The landlord was granted a declaration that the break clause had not been complied with, and the lease had not been terminated.
Factually, this is an exceptional case, but disputes over the meaning of “vacant possession” are not at all uncommon. As a standalone phrase, tenants regularly interpret it as meaning an empty property must be returned. Its legal definition is far more complex and nuanced. It must be read in the context of the available documentation, agreements reached and any existing authorities.
Failing to appreciate the complexities and risks involved with exercising a break clause can be hugely expensive for a tenant. This is a particularly sobering case – not only has the lease not been terminated, but the property was stripped back to a shell in the expectation (or hope?) that the lease would terminate.
Tenants should be careful to avoid a DIY approach to interpreting leases and exercising notices of this nature – initial investment in procuring expert advice will be a drop in the ocean compared to the cost of getting it wrong. All too often, the advice is sought once things have gone wrong, and not before they are allowed to.
We can assist landlords and tenants with advising on service of, or responding to, break notices. For further information and assistance email email@example.com, telephone on 0330 320 1440 or fill in our online Contact form.