Vacant Possession in the Context of Break Clauses

In the recent case of Capitol Park Leeds plc and another v. Global Radio Services Limited [2021] EWCA Civ 995, the court had to determine whether the exercise of a break clause was effective, with the dispute turning on whether or not vacant possession had been given by the tenant.

Background

The case involved a Lease dated 4th March 2002 of a commercial building in Leeds.  The original Tenant, Real Radio (Yorkshire) Limited had assigned the Lease to Global Radio Services Limited (“Global”) in 2014.

On 15th February 2017, Global sought to terminate the Lease on 12th November 2017 by exercising the break option in clause 10 of the Lease.  In accordance with clause 10.1.4 of the Lease, the Tenant was required to give vacant possession of the premises to the Landlord on the relevant Tenant’s break date.  The Lease contained the usual covenants with regard to keeping the premises in repair and not to make structural alterations.  In addition to this, clause 3.20.1 stated that the tenant is:

To yield up the Premises to the Landlord at the End of Term with vacant possession in a state of repair, condition and decoration which is consistent with the proper performance of the Tenant’s covenants in this Lease.”

Global had stripped out a number of items within the premises by 12th November 2017, which included ceiling grids, ceiling tiles, fire barriers, floor finishes, ventilation ductwork, window sills, office lighting, radiators, heating pipework to radiators, floor boxes, smoke detection system and other items. Evidence was presented to the Judge that showed that these features which had been removed had been part of the original base build specification and were therefore the Landlord’s fixtures or potentially an element of the building itself.

When the case was heard before the Deputy High Court Judge, it was concluded that the Lease had continued past the break clause, as Global had failed to give vacant possession of the premises in accordance with the break clause.  This decision was then appealed.

Legal issues and Decision on appeal

The Court of Appeal was required to consider whether the Tenant had terminated the Lease by exercising this break clause and providing vacant possession, despite the fact that the premises was effectively devoid of the essential fixtures and fittings.  The court deliberated the meaning of clause 10.1.4 in the context of the Lease as a whole, and agreed that it would normally require the premises to be given back to the Landlord free of the “trilogy of people, chattels and interest” as stated in the case of Goldman Sachs International v. Procession House Trustee Limited and Another [2018].

The court considered the fact that break clauses can be conditional on the Tenant having to observe specific requirements in respect of exercising a break clause.  In this Lease, however, the break clause did not specifically state that it was conditional on the Tenant having to observe and perform all of the covenants in the Lease, nor did it specifically require the Tenant to have fulfilled its repairing obligations pursuant to the terms of the Lease.

In conclusion, despite the fact that the premises were left in a terrible state, the Court of Appeal found that the Tenant had exercised the break clause effectively and therefore the Lease terminated on 12th November 2017.

The Landlord was not left without a remedy, but had the ability to seek compensation for the loss that it had suffered as a result of the Tenant’s breaches of the Lease.

This case is an important reminder to those drafting Leases to ensure that due consideration is given to the extent of the break clause provisions.  This is to protect Landlords, to ensure that they receive back a building that is not less than the premises defined in the Lease.

If you have any queries relating to commercial property disputes, please contact Nicola Stewart for advice and assistance.

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