Break condition requiring vacant possession was satisfied where tenant left the property in dysfunctional condition (Court of Appeal)

The tenant (G) of a commercial lease had the right to break if it gave vacant possession of the “Premises”.

The Premises were defined as including the original building on the property, landlord’s fixtures (whenever fixed) and all additions and improvements. After giving notice to terminate, G stripped out various key features of the premises, including ceiling tiles, lighting and heating, with a view to replacing them before vacating. G paused work while it tried unsuccessfully to settle its outstanding liabilities and agree a surrender with the landlord (C). G did not replace these features before moving out.

The High Court held that the requirement for vacant possession had not been satisfied, as the definition of premises prevented G from handing back an empty shell of a building which was dysfunctional and could not be occupied. The requirement for vacant possession could not be satisfied where the state of the property meant that C’s use of the property was substantially impeded. G appealed.

The Court of Appeal (Newey, Laing and Moylan LJJ) overturned the decision of the High Court. It held that a condition for vacant possession requires the tenant to return the property to the landlord free from people, chattels and legal interests, rather than being concerned with the physical condition of the property. In this particular lease, the break clause was not expressed to be conditional on the tenant having observed and performed any covenants in the commercial lease, including any repairing obligations.

C submitted that the premises (as defined) were to be returned to them under the break clause. As the definition of premises extended to the landlord’s fixtures (subject to replacement of any such items in accordance with the covenants in the lease and the de minimis rule) and G had removed those fixtures, G had failed to comply with the break clause. The court held that this interpretation of the lease would have unintended implications for the parties and would undermine business common sense, particularly as C could recover compensation from the tenant for the breach of repair separately.

The court made it clear that a tenant wishing to exercise a break clause has to comply with any conditions attached to the exercise of the clause, but those conditions should not necessarily be interpreted so as to favour the landlord.

What is imperative is, whether it is advice on a new lease that includes a break clause, or advice on exercising a break clause within an existing lease, take legal advice.  Our Legal 500 recognised Commercial Property Team are All The Help You Need.

(Case: Capitol Park Leeds plc v Global Radio Services Ltd [2021] EWCA Civ 995 (5 July 2021) (Newey, Laing and Moylan LJJ)