Commercial lease break clauses and the difficulties of vacant possession
Tenant break clauses have long been difficult and a recent case demonstrates that too much vacant possession can be as much of a problem as too little. So what is vacant possession? And should it ever be a condition for exercising a break?
The meaning of vacant possession should be obvious. Contracts routinely provide for sales or lettings with vacant possession. The vast majority of contracts go through containing this wording with no difficulty, and no discussion as to meaning. But this doesn’t mean the term is necessarily fully understood by the parties, or even always complied with. The majority of property contracts are entered into by parties who ultimately want them to go ahead and are more interested in completing the sale or lease than the finer points of the law.
Lease break clauses occupy a very different space. Whilst these are negotiated when the parties are all too keen to enter into the lease, very often the break is definitely only wanted by one party. So, a tenant serves a break notice, and the landlord starts looking for a way not to accept it.
Lease break clauses
Lease break clauses are commonly stated to be conditional and to only take effect if the conditions specified have been met.
The RICS Code for Leasing Practice 2020, continuing from the 2007 Code, is clear that the only conditions that should be imposed on a tenant break are payment of the basic rent and giving up occupation leaving no sub-tenants or other occupiers. The code does recognise that other conditions may be imposed and break clauses continue to commonly include vacant possession conditionality.
Definition of vacant condition
So what is vacant possession? According to PLC,
“The obligation to give vacant possession requires the seller to:
- Make the property available on completion in a state in which the buyer can both physically and legally occupy it.
- Give the buyer the undisturbed enjoyment of the property”
Clear? Given the litigation on the subject, probably not. There are clear cases, a beautifully emptied and cleaned property with no occupiers is provided with vacant possession, a property full of people is not. The position is not always so clear cut.
People in occupation
Leaving people in occupation, even if limited in numbers, is clearly an issue. In NYK Logistics (UK) Limited v Ibrend Estates BV in 2011, vacant possession wasn’t given due to two workmen finishing off some works on the property, with security also being left in place.
This might seem obvious but in Riverside Park Limited v NHS Property Services Limited in 2016 (a case not strictly on vacant possession but sufficiently close to be indicative) leaving full security in place, and physical obstacles to access was not considered a problem on a break. Unlike the previous case, the security was left in place at the request of the landlord and not for the tenant’s benefit.
Objects in occupation
It has long been the case that leaving too much in a property prevents vacant possession being provided. A recent case illustrating this is Riverside Park Limited v NHS Property Services Limited in 2016. Vacant possession was required for the exercise of a break clause. The tenant left internal demountable partitioning on the property. This was held to prevent vacant possession being given, as the partitioning was of benefit to the tenant only.
More recently, removing too much from a property has been ruled to prevent vacant possession being given. In Capitol Park Leeds plc v Global Radio Services Limited in 2020, the tenant was obliged to give up the property with vacant possession on the exercise of a break clause. The tenant duly removed all its fixtures and fittings as required but, as part of those works, it also removed base build items and some of the landlord’s fixtures with a view to carrying out additional works to reduce its dilapidations liability. At the break date, all the tenant’s fixtures were out, but so too were items necessary to use the property. This was ruled not to be vacant possession; the break was ineffective. It should be noted there was no repair conditionality in the break, and in addition, the tenant failed to complete the works it was undertaking as it had been negotiating a surrender with the landlord, which ultimately didn’t take place.
Vacant possession, it seems, is far from clear cut. This article has only skimmed the surface of the difficulties. Ultimately, vacant possession is very much a specific issue for each property. If you are facing a lease with a conditional break clause then it needs to be read very carefully to establish what is necessary and, if vacant possession is required, the precise requirements for that property need to be established.
Going forward, if you are a tenant, try very hard not to agree vacant possession as a condition of a break clause. Be aware that the landlord may have genuine concerns about the property, but make sure these are specific.
And, if you are a landlord, be aware of what vacant possession really means. Spell out specifically what you actually need from the tenant on the termination. This may be more than the baseline position of the 2020 Lease Code, after all, specific tenant alterations or tenant fixtures may represent a serious problem in reletting, causing unnecessary delays and costs that it will be difficult to recover.
In the end, certainty reduces disputes, reduces litigation, and therefore reduces cost for all parties.
For more information on vacant possession, please get in touch with our experts listed below.
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