Commercial Property Litigation – The meaning of vacant possession in break clauses

Commercial Property Litigation – The meaning of vacant possession in break clauses

Capitol Park Leeds Plc & Anor v Global Radio Services Ltd [2021] EWCA Civ 995

It would be easy to assume that where a break clause requires premises to be returned with vacant possession it would simply mean that it was vacant when then the keys were returned. But what constitutes vacant?

In 2014, Global Radio Services occupied a property owned by its landlords Capitol Park and in 2017 sought to exercise a break clause to vacate. The tenants had stripped out a number of fixtures from the property including major components of the premises such as lighting and heating as part of reinstatement works to comply with the yielding up obligations but had failed to reinstate them prior to handing back the keys.

The landlords issued a claim in the High Court on the basis that the tenants had failed to give vacant possession of the premises because the premises were defined as including the landlord’s fixtures, additions and improvements. The landlords argued that because not all of the fixtures had been returned, the tenants had not complied with the lease provisions and therefore the lease was ongoing and they were liable for ongoing rent. The High Court found in favour of the landlord and confirmed that the landlord’s use of the premises was impeded, granting a declaration that the break was ineffective and the lease was continuing.

The tenants appealed this and were successful in having the judgment overturned. Last month the Court of Appeal gave clarity on the definition of vacant possession confirming it to mean that a property was returned to a landlord free of chattels, people and interest and did not include the physical condition of the property. The Court added that the landlord could still recover damages from the tenant for the physical condition in accordance with other provisions of the lease.

The High Court had strictly interpreted the wording of the lease and the specific definition of the word ‘premises’. However the Court of Appeal considered that there had not been enough weight attached to business common sense. In the judgment handed down, Newey LJ said “the fact that the conditions prescribed in a break clause must be strictly complied with (see e.g. Siemens Hearing Instruments v Friends Life Ltd [2014] EWCA Civ 382, [2014] L &TR 27, paragraphs 27-29) does not mean that the clause must be construed strictly or, in particular, adversely to the tenant. A tenant wishing to exercise a break clause has to comply fully with whatever conditions have been attached to the exercise of the clause, but it does not follow that the conditions should be interpreted so as to favour the landlord”.

This serves as a significant reminder to landlords that when drafting contracts it is important to clearly spell out in the lease exactly what is required from a tenant on the break date. Any conditions which involve an element of discretion or interpretation will give rise to dispute.

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