Landlord and Tenant break options: vacant possession vs a vacant building
10 December 2020
The recent UK case of Capitol Park Leeds Plc – v- Global Radio Services Limited represents a new risk area for tenants seeking to deliver up vacant possession in the context of a tenant exercising a break option to determine a lease. In particular, it demonstrates to tenants the importance of complying strictly with the relevant provisions under the lease. This may mean accurately identifying those portions of a fitout which are the tenants as against those portions of the fitout which are the landlords and complying in full with any obligation to return the property in a fit and proper condition thereby ensuring that there are no claims for dilapidations. Tenants should review the lease carefully and proceed with caution when exercising a break option.
Many commercial leases contain break options which can have a number of conditions attached which tenants must comply with in order to effectively exercise a break option. In Capitol Park Leeds Plc – v- Global Radio Services Limited, Global Radio Services (the “Tenant”) had exercised the break option available to it under the lease. The break option required the Tenant to ensure vacant possession of the premises when returning it to Capital Park Leeds, the “Landlord”. This condition seems to be relatively straight forward. However, it did cause difficulties for the Tenant in that the vacant possession obligations required the Tenant to strip out various items from the premises and hand back the premises as an empty shell to the Landlord. The Tenant accepted that it may have handed back the property in a state which did not comply fully with its repairing obligations under the lease but it argues that it had nevertheless given vacant possession and that therefore it complied with the break conditions.
The Landlord argued that the Tenant had returned “less than the Premises” as the definition of the Premises in the Lease included “all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings”. The Landlord maintained that without the strip out elements, the Tenant had not given back the premises for vacant possession and the Tenant had actually given back substantially less.
Finding in favour of the Landlord, the High Court ultimately agreed with the Landlord and it held that by handing back a fully stripped out property, the Tenant had not delivered up vacant possession as it was obliged to do by the lease. It held that the removal of fixtures and fittings resulted in substantial impediments to the Premises and, as a result, also impeded the Landlord’s use, which the strict definition of the Premises in the Lease was drafted to prevent. Instead the Tenant had handed back a “dysfunctional and unoccupiable” building. In that regard the break was found to be invalid and the lease will now continue until the expiry of its term in 2025.
Whilst the Tenant has now been granted permission to appeal the ruling, this judgment serves as an important reminder for tenants that the exercise of a break option should be treated with caution especially when a break option is conditional on a tenant complying with any covenants or obligations to comply with the terms of a lease. The ruling also serves as a particularly stark reminder for tenants to understand its vacant possession obligations.
When acting for a tenant, it is important that legal practitioners review the lease carefully and advise the tenant of its obligations on how a property should be handed back under a lease. This case demonstrates how tenants may fall foul of its obligations to deliver up vacant possession by clearing out too much from a property as well clearing out too little. The consequences for a tenant getting a break option wrong can be severe.