Keeping empty promises

The recent decision in the case of Riverside Park v
NHS Property Services is another salient reminder to tenants of the
inherent danger of break options that are conditional on the tenant providing
vacant possession of the premises. Tenants should avoid such conditions
wherever possible. The case also highlights the importance of complying with conditions
imposed by a licence to carry out alterations.

What was the dispute
about?

In 2008 the tenant entered into a 10 year lease of first
floor, open-plan style office premises, inclusive of a tenant’s option to
terminate the Lease on 24 September 2013 (the Break Date), exercisable on
giving not less than 6 months’ notice in writing and conditional upon the
tenant giving vacant possession of the premises to the landlord on or before
the Break Date. The tenant simultaneously entered into a licence to carry out alterations,
permitting the tenant to (amongst other things) install kitchen units and
partitions to create a series of small offices.

The Licence required the tenant to comply with certain
obligations, such as:

(a) obtaining approvals for the Works from their insurers;

(b) complying with the specifications relating to the installation of the partitioning; and

(c) giving notice to the landlord once the Works had been completed.

The tenant failed to comply with any of these obligations.
Crucially, for the purposes of this dispute, the tenant did not comply with the
specifications relating to the installation of the partitioning. The ‘demountable’
partitions were installed on top of the raised floor and only extended to the
underside of the suspended ceiling. They were not, as required by the Licence,
fixed to the structural slabs below the raised floor and above the suspended
ceiling.

Shortly after the expiry of the tenant’s notice seeking to
terminate the Lease on the Break Date, the landlord informed the tenant that it
had failed to provide vacant possession of the premises as required by the
Lease.

What did the Court
decide?

The Court found that the tenant had failed to give vacant
possession of the premises, so the Lease would continue until September 2018 at
the earliest, with the tenant remaining bound by its obligations under the
Lease.

What was the basis
for the Court’s decision?

The concept of vacant possession essentially has two
elements. The first, a subjective test, is to see whether or not the tenant has
continued to claim a right to use the premises for its own purposes. The second,
an objective test, is whether the landlord has the right to actual, unimpeded
physical enjoyment of the property. If there is an impediment which
substantially interferes with or prevents the right of possession of a
substantial part of the property, then vacant possession will not have been
given.

The Court held that the partitions installed as part of the
Works constituted chattels, rather than tenant’s fixtures, and as such the
tenant had failed to provide vacant possession. In deciding whether the
partitions were chattels or tenant’s fixtures, the Court was required to consider
two elements.

• The degree of annexation of the item to the premises and whether it could be easily removed without material damage to theitem and to the premises; and
• The purposes of the annexation – whether it was for the permanent and substantial improvement of the premises (which wouldindicate it was a fixture) or for the complete enjoyment and use of it as achattel.

By installing demountable partitions rather than the more permanent partitions specified in the Licence, the tenant had contributed to the partitions being determined by the
Court to be chattels rather than tenant’s fixtures.

However, the Court held that even if the partitions had been
held to be tenant’s fixtures, the tenant still would have failed to provide
vacant possession of the “premises”, the definition of which
specifically excluded tenant’s fixtures.

The Licence required the tenant to reinstate the Works at
the end of the term if the landlord reasonably required or as soon as the
Licence ceased to have effect. The Licence also stipulated that it would cease
to have effect in the event of a material breach of the tenant’s obligations in
respect of the Works. The tenant had not satisfied many of the obligations and
as such, the Licence had ceased to have effect, therefore requiring the tenant
to reinstate the Works. If the Licence had remained in effect then the landlord
would have had to notify the tenant in order to impose the obligation to
reinstate the Works, but in the circumstances, this obligation was not
applicable.

What does this mean
for landlords and tenants?

This case is a reminder that:

• Tenants should wherever possible avoid break options conditional upon providing vacant possession, and pay close attention to the obligations imposed on them by any consents granted by their landlord.
• Landlords should check the terms of the lease and any licence carefully whenever a tenant is seeking to exercise a conditional break option. If the situation is managed properly, they could end up in a very enviable negotiating position.