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In the recent decision of Capitol Park, the Court of Appeal consider the meaning of ‘vacant possession’ and whether the removal by a tenant of items from a premises that make up the building itself can invalidate a break notice.

Background

Global Radio Services, the tenant, served a break notice to terminate the lease of the premises in November 2017.  One of the conditions of exercising the break was that vacant possession must be given.   After service of the notice the landlord and tenant entered into negotiations concerning dilapidations, however agreement was not reached.

At termination the tenant had stripped out various items from the premises resulting in the premises being handed back to the landlord in an empty shell-like state.  The features/fixtures removed included ceiling grids and tiles, windowsills, heating pipes, lighting, floor finishes, duct work and fire barriers.

The Landlord contended that due to the removal of these items vacant possession was not given by the tenant, the tenant had therefore failed to comply with the break conditions rendering their attempt to break the lease invalid.

The decision of the High Court

At first instance Mr Benjamin Nolan QC, sitting as a Deputy High Court Judge, concluded that the lease continued past the break date because the tenant had failed to give vacant possession of the premises in accordance with the break clause.

“By including the words ‘all fixtures and fittings at the Premises whenever fixed (except Tenant’s fixtures)’ and ‘all additions and improvements made to the Premises’, the Claimant was ensuring that a Tenant exercising its Break Option could not do so by handing back an empty shell of a building which was dysfunctional and unoccupiable.

But in the end, this is what the Defendant did.  On my findings, they stopped the work unilaterally in the hope of negotiating a settlement.  Those negotiations failed, the clock ran down, and the Defendant gave back considerably less than ‘the Premises’ as defined in the Lease.  It did not give vacant possession.  In my view, this is an exceptional case and therefore the second test identified in Cumberland and in Legal & General [1] is satisfied, namely that the physical condition of the Property was such that there is a substantial impediment to the Landlord’s use of the Property, or a substantial part of it. Accordingly, I rule that on the 12 November 2017 the Defendant did not give the Claimant vacant possession of ‘the Premises’ and, as there is no estoppel, the Claimant is entitled to the declaration sought…”

The decision of the Court of Appeal  

The lower court’s decision was appealed by the tenant and Lord Justice Newey, Lady Justice Elizabeth Laing and Lord Justice Moylan found unanimously in the tenant’s favour, noting that “’vacant possession’, which is what clause 10.1.4 of the Lease requires, conventionally involves a ‘trilogy of people, chattels, and interests’”.

The court was not persuaded by the Landlord’s argument that in order to comply with the terms of the lease the tenant must give back their interpretation of “the Premises” being, “the building which was in existence when the lease was granted”.  The tenant’s interpretation of “the Premises as they are from time to time” was preferred.  It was noted that the strict interpretation the landlord sought may result in a tenant being unable to comply with the clause in circumstances where the premises had been damaged by an insured risk.

It was further noted that clause 10.1.4 did not contain the requirement found in other leases which required tenants to have observed and performed their covenants.  LJ Newey also contrasted 10.1.4 with the covenant to yield up which in this instance did require the Premises to be yielded up “in a state of repair, condition and decoration which is consistent with the proper performance of the tenant’s covenants.”

The requirement to return the premises to the landlord on the break date was thus a requirement to return them free of people, chattel and interests.  The fact that the premises had been left in a dire state did not prevent the tenant validly exercising the break clause.  The landlord’s remedy was to seek compensation for any losses suffered.

For further information on this decision or to discuss a property litigation matter in further detail, please contact Sarah-Kate Jackson, Partner in the Grant Saw Litigation department.

           [1] Cumberland Consolidated Holdings Ltd v Ireland [1946]1KB 264 and Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2006] EWHC 1008 (Ch)             [2006] L&TR 22