Exercising a Break Clause - Vacant Possession Spotlight
There are many reasons why a tenant may wish to terminate its commercial lease before the end of the contractual term. In such situations, a tenant might look to exercise the break option in the lease.
In order to successfully exercise the break option, there are often strict conditions that must be complied with. Depending on the drafting of the lease, such conditions could include, serving the break notice within a certain timeframe before the break date, yielding up the premises with vacant possession and, or ensuring there are no ongoing breaches of the tenant covenants. The High Court’s decision in Capitol Park Leeds v Global Radio Services Limited  EWCH 2750 (Ch), highlights the importance of complying with such conditions. Kimberley Fox, a Solicitor in our Property department, discusses this further.
There is a risk that a tenant’s notice to exercise a break option is ineffective, where the break conditions are not fully executed; and this ultimately means the lease continues.
Case law tells us that the obligation to give vacant possession requires the tenant to leave the premises in a state in which the landlord can both physically and legally occupy it with undisturbed enjoyment. It would therefore sensibly follow that where vacant possession is required, this condition would not be satisfied where a tenant does not fully remove itself and its chattels from the premises.
What is particularly interesting in the recent case of Capitol Park Leeds v Global Radio Services Limited  EWCH 2750 (Ch),is that the tenant went a step further than removing itself and its chattels and in fact removed too many items. The question as to whether taking too many items from the premises, could equally negate vacant possession, was put to the High Court.
Facts of the case
The tenant in this case, sought to exercise the break option in the lease and following service of the notice, proceeded to undertake dilapidation works stripping the premises back to its shell. This included the removal of a number of the original fittings that pre-existed the tenant’s occupation including radiators, window sills, ceiling tiles, ventilations ducts, pipework, and other fittings that could reasonably be assumed actually belonged to the landlord. The tenant stopped its dilapidation works in the hope of negotiating a settlement with the landlord, but failed to replace these items before the break date.
When reviewing the facts of the case, the definition of ‘Premises’ in the lease was noted as including “all fixtures and fittings at the Premises whenever fixed, except those regarded as [belonging to the] tenant”. The landlord argued in that returning the premises without the original fixtures and fittings, the tenant had not complied with the condition to give vacant possession.
The High Court held, that the premises delivered up on the break date, were not the same premises as defined in the lease. The tenant had left an empty shell which was dysfunctional and incapable of being occupied. Consequently, the lease continued and the tenant remained bound to its obligations and covenants under the lease.
Permission to appeal this decision to the Court of Appeal has been granted, so it may well be that the decision in this case is overturned, but irrespective of the final outcome, this case emphasises the importance of effectively breaking the lease and complying with the break conditions and serves as a stark reminder of the consequences of not fully executing the conditions.
If you have any queries regarding your Commercial Lease, please do get in contact with one of our Commercial Property team.