Breaking badly | Are you really giving 'vacant possession'?

The recent decision in the case of Capitol Park Leeds v Global Radio Services should serve as a stark warning to tenants of the risks involved when exercising a break option which is conditional on providing vacant possession.

As a consequence of the Coronavirus pandemic, many corporate tenants are likely to be contemplating whether to exit their existing leases. The decision in this case highlights why tenants who don't seek professional advice when attempting to exercise break options could end up paying for years to come – even if they have closed down all business operations.

What was the dispute about?

The dispute related to a 24 year lease of a modern commercial unit. The lease included a break option, allowing the tenant to terminate the lease at a certain date, on giving at least six months' notice. The break option was conditional upon the tenant giving vacant possession of "the Premises" to the landlord on or before the break date. The "Premises" was defined in the lease as including "all fixtures and fittings… whenever fixed… and all additions and improvements made to the Premises".

The tenant duly served notice to exercise the break option and landlord's solicitor served the tenant with a schedule of dilapidations and a letter which gave notice to reinstate the premises. The tenant started repair and reinstatement work but in doing so stripped out significant elements of the base build and removed several of the landlord's fixtures, including radiators, heating pipework, window sills, smoke detection systems and ceiling tiles, (despite these falling within the definition of the "Premises" that the tenant had to return to the landlord). The tenant stopped the reinstatement work in the hope of negotiating a settlement with the landlord. However, it did not replace the elements of the premises which it had removed. Ultimately, the parties were unable to reach a settlement.

The tenant subsequently handed back the keys to the landlord, asserting that it had complied with the break condition because it left the premises vacant of any person, chattels and/or other interests and had therefore given up vacant possession. The landlord argued that the tenant had not given vacant possession and therefore that the break option had not been properly exercised. The landlord contended that it was not able to enjoy the immediate use/occupation of the premises, due to the removal of parts of the base build and many fixtures.

What did the court decide?

The court found that the tenant had failed to give vacant possession of "the Premises", as defined in the lease, therefore invalidating the tenant's attempt to exercise the break option. The tenant will therefore remain liable to pay all rent and comply with all of its obligations under the Lease, until the end of the Lease term.

Vacant possession

The concept of vacant possession essentially has two elements. The first is whether the tenant has continued to claim a legal interest in the premises or, in other words, has continued to claim a right to use the premises for its own purpose. The second is whether the landlord has actual, unimpeded physical enjoyment of the premises. If there is an impediment which substantially interferes with or prevents the landlord's enjoyment of the premises, then vacant possession will not have been given.

The majority of case law authorities in this area concerned circumstances where items have been left in situ which substantially impede the landlord's enjoyment of the premises.

In this case, the court held that the tenant substantially impeded the landlord's enjoyment of the premises by stripping it of its base build and essential fixtures. Accordingly, on the relevant break date, the tenant had not delivered up "the Premises", as required by the break condition, but instead had handed back to the landlord "an empty shell of a building which was dysfunctional and unoccupiable."

What does this mean for landlords and tenants?

Permission to appeal to the Court of Appeal has been granted, but regardless of the result that appeal, this case is a reminder that:

• Tenants should wherever possible avoid break options conditional upon providing vacant possession. If faced with exercising such a break, it is imperative that the tenant takes advice and commences negotiations with the landlord as soon as possible.
• Landlords should carefully check the terms of the lease whenever a tenant is seeking to exercise a conditional break option. If the situation is managed properly, landlords could end up in a very strong bargaining position.