Court's interpretation of 'vacant possession' invalidates commercial lease break
20th November 2020
“STOP PRESS: This decision was reversed by the Court of Appeal on 5 July 2021. Please see our update briefing for further information.”
Why do landlords and tenants need to know about Capitol Park Leeds v Global Radio Services?
Back in March 2020 Walker Morris explained that businesses often look to divest themselves of surplus property to reduce rental commitment in times of economic decline or uncertainty. Challenges facing the high street and the office sector as a result of the Coronavirus pandemic and the dramatic increase in home-working are now contributing to increasing numbers of businesses exercising break options, with a view to bringing about early termination of leasehold liabilities.
Once the decision has been made to bring a commercial lease to an end, the failure to serve a valid break notice can have drastic consequences. The business may lose the opportunity to break the lease and may therefore remain liable and tied into the property with long-term, unwanted commitments. The position is complicated by the fact that many lease break options are fraught with legal and technical traps for the unwary. The detailed and practical advice offered in our earlier briefing therefore remains absolutely pertinent.
In addition, the High Court’s decision in the very recent case of Capitol Park Leeds plc v Global Radio Services Ltd [1] seems to represent a new risk area for tenants seeking to deliver-up vacant possession in the context of their exercising an option to determine the lease.
What was the key issue?
Many commercial lease break options have a number of conditions attached and those must be approached with caution.
In Capitol Park Leeds v Global Radio Services, the valid exercise of the tenant’s break option was conditional upon delivery up, on the break date, of vacant possession. That might sound straight forward enough – and indeed it is a very common break condition. However the case differed from existing authorities on what it means to give vacant possession, because it did not centre on items that had been left behind by the tenant – rather it was concerned with the fact that the tenant had stripped out various items [2] and had handed back an empty shell.
The tenant accepted that it may have handed back the property in a state which did not comply fully with its repairing obligations, but it argued that it had nevertheless given vacant possession, and had therefore complied with the break condition. The landlord referred to the definition of ‘Premises’ within the lease, however, and maintained that, without the stripped-out elements, the tenant had not given back ‘the Premises’, or vacant possession thereof, at all – it had actually given back substantially less.
The High Court undertook a contractual interpretation exercise to determine what exactly it would mean to give back vacant possession of the ‘Premises’ (as defined) in light of the terms of the particular lease.
The lease defined the ‘Premises’ as “including all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings, and all additions and improvements made to the Premises…“.
The High Court therefore ultimately agreed with the landlord. It held that, in handing back a fully stripped-out property, the tenant had not delivered up vacant possession as it was obliged by the lease to do. Instead, the tenant had handed back a “dysfunctional and unoccupiable” building.
Consequently, the break was invalid and, in the absence of another option for early termination, the lease will now continue until the expiry of its term in 2025 [3].
What are the practical, takeaway points from this case?
- To fully understand how it should hand back a building, a tenant should read its covenant to deliver up vacant possession alongside the definition of the premises within the particular lease.
- The High Court has now confirmed that it may be possible for a tenant to fall foul of its obligation to deliver up vacant possession by clearing out too much from a property, as well as by clearing out too little.
- A departing tenant should, of course, also consider any obligation to deliver up vacant possession alongside other relevant lease covenants, such as the repair obligations and any reinstatement provisions.
- Exercise of any break option – especially a break option which is at all conditional on the tenant’s compliance with any covenants or obligations; and especially any ‘once and for all’ break option [4] – should be treated with caution. There can be a myriad of hurdles to the valid operation of a break, and the consequences of getting it wrong can be severe.
- As well as adopting the ‘When? How? Who? What?’ approach to effecting lease breaks (again, see our earlier briefing), it is likely be prudent for any tenant considering an early departure from leasehold premises to take specialist legal and surveying advice as part of its overall exit strategy.
Contact
Walker Morris’ Martin McKeague is a partner specialising in real estate litigation and is an expert on all aspects of commercial lease disputes and portfolio management, from both a landlord and a tenant perspective. Please do not hesitate to contact Martin or any member of the Real Estate Litigation team for any further advice or assistance.
[2] including ceiling grids and tiles; fire barriers; boxing to columns; floor finishes; window sills; fan coil units and pipework; ventilation duct work; lighting; smoke detection system; radiators and heating pipework; power cables; and the like
[3] albeit we understand that leave to appeal this decision to the Court of Appeal has been granted, so this case will be ‘one to watch’
[4] i.e, as opposed to a ‘rolling’ break option (where other opportunities to effect a break are afforded by the lease in the event that one break option fails)
