Vacant possession and tenant break rights – is your leasehold break clause worthless?
The recent case of Capitol Park Leeds plc v Global Radio Services Limited  EWCA Civ 995 Capitol Park Radio v Global Radio Judgment (judiciary.uk) has once again raised the issue of conditions attaching to tenant break clauses in leases, particularly that of vacant possession.
Facts of the case
In this case, one of the pre-conditions to the tenant’s break clause, was that the tenant should “give vacant possession” on the break date. The tenant sought to exercise the break clause, by which date it had started its dilapidations works and had stripped out of the unit a range of items including ceiling grids, ceiling tiles, fire barriers, floor finishes, pipework, lighting, smoke detection systems and radiators. The evidence showed that these items had been part of the original base build specification and so in law were landlord’s fixtures or elements of the building itself. As it was the premises were not in a fit state to be occupied.
The landlord contended that the break was ineffective because the tenant had not given “vacant possession of the Premises”. “The Premises” was a defined term, which included both the original building and “all fixtures and fittings at the Premises whenever fixed”. The landlord therefore argued that, by removing significant elements of the building or fixtures, the tenant had failed to give back “the Premises” as required by the lease.
The landlord won its argument at first instance and so the tenant appealed.
The Court of Appeal held that whilst the building had been left in a dire state and unfit for occupation, that did not preclude valid exercise of the break clause and the landlord’s remedy was to seek compensation for whatever loss it may have suffered. The argument was best left to dilapidations negotiations but the break was held to have been validly effected.
Thankfully in this case the Court took a pragmatic view and found in favour of the tenant. However, that’s not often the case and in many instances, the Court tends to find in favour of the landlord. Certainly when it comes to providing “vacant possession”, even a cigarette packet or other rubbish or items of furniture left behind in the premises were found to defeat a tenant’s right to break its lease, thus leaving it bound by the lease for the remainder of the term, or until the next break date. The difference here seems to be between leaving too much behind vs leaving too little behind.
What does the RICS Lease Code say? – Code for leasing business premises, 1st edition (rics.org)
The RICS Code for Leasing Business Premises 2020 states that:
“Unless the parties have agreed stricter conditions in the heads of terms, a tenant’s break should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry…. Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect. Repayment of service charges may be deferred until the service charge accounts are finalised.”
Note that the Lease code is only a guide and is not legally binding but it can be a useful negotiating tool.
So what’s the solution?
Best practice is to have a completely unconditional tenant break clause or to include only those conditions set out in the Lease Code – any conditions relating to vacant possession or the condition of the premises should be excluded.
This is best negotiated at Heads of Terms stage to avoid any issues in negotiating lease clauses so please ensure that your commercial agents are aware of this. Once heads of terms are agreed it can often be difficult for your solicitor to argue that any pre-agreed conditions should be removed.
If you would like any advice on your Heads of Terms whilst they are at draft stage, any assistance with negotiating break clauses in leases, or any advice on an existing break clause in your current lease, then please do contact Keelys Real Estate team. Our Disputes team can also assist when it comes to the exercise of your break clause to ensure any conditions timeframes and service provisions are complied with.
Kate Palmer is a Partner in Keelys Real Estate team.