Commercial leases, vacant possession and failing to break – even when you have vacated

Commercial leases, vacant possession and failing to break – even when you have vacated

Published: 30 September 2016

Commercial leases, vacant possession and failing to break – even when you have vacated.

A tenant’s recent failure to break its lease, even though it had physically vacated, provides (another) salutary lesson to tenant’s when seeking to implement break ‘right’s’ – Riverside Park Ltd –v- NHS Property Services Ltd [2016].

Key background points

·         Break options are very valuable to tenant’s in terms of flexibility and exiting an unwanted or unaffordable lease.

·         Break options are now widely known to be subject to, at least, some conditions – and that’s pre-conditions, not terms.

·         Compliance with conditions in options (inc break options) is treated strictly under English law. i.e. if you do not strictly comply with all the conditions the break is completely ineffective and the lease continues – whether consider harsh or no.

Vacant possession

·         A relatively common pre-condition is that the tenant delivers up vacant possession.

·         It is a concept which in broad ‘more or less’ terms, is easily understood – i.e. the tenant has to get out of the property. Correct?

·         Sometimes yes, but certainly not complete.  In legal terms vacant possession can be a far more complex concept – a subject in of itself of legal textbooks.

·         However, in summary terms it means that on the break date the tenant has to ensure that nothing substantially prevents or interferes with the landlord’s right of possession of the property.

·         In practice it can therefore (especially when landlords choose to probe) give rise to difficult questions about what items can or should be left and whether they will contribute to or cause a failure to deliver up vacant possession. Are the items chattels or landlord’s fixtures or tenant’s fixtures? Am I obliged (or entitled) to remove them and so on.

Riverside Park –v- NHS Property

In Riverside the tenant vacated the premises – no question there. It also removed the vast majority of free standing and easily removable items – so in one sense it had vacated and given the landlord possession of the property.

However, it left some items, including partitioning which it had earlier installed at the premises (with consent). 

The Court ultimately found that the Tenant did not deliver up vacant possession.  The partitioning were chattels (on the facts of this case), the tenant was obliged to remove them and the failure to do so substantially interfered with the landlord’s right to possession of the property.

A failure to give vacant possession + strict compliance with pre-conditions = no lease break = lease continues for the duration of the term = disastrous result for the tenant – any perceived unfairness notwithstanding.

Key take-away points/lessons

·         The case comes as no surprise to those familiar with the pre-existing cases in this area. The case is however relatively rare so far as it is an example of a tenant who had for the most part sought to ‘get out’ of the premises by the break date but still, for ‘technical’ issues around fixtures and chattels and consents under the lease, had not delivered up vacant possession.

·         It is therefore a salutary reminder that, without careful consideration, things can subtly, unexpectedly and irreversibly go very wrong for the tenant.

·         Lesson 1 – ‘nip it in the bud’ – when negotiating a lease, seek to avoid agreeing vacant possession as a pre-condition. Whilst sometimes fairly straightforward on other occasions, much less so.  Avoid it. The business Lease Code does not have it in either.

·         Lesson 2 – treat it seriously.  If your break right does have vacant possession as a pre-condition, take it seriously, take advice (surveying and legal), plan early (say 6-12 months) and plan well. The risks are too high to take it casually or assume that things will work out ok.

·         Lesson 3 – ignore notions of common sense or reasonableness. In this area (break rights and strict compliance), put considerations of fairness or reasonableness to one side.  They often make a heavy influence on how seriously a tenant treats the break right, but they play little part in the legal analysis – however communicative, reasonable and fair a landlord appears to be leading up to the break date.

·         Lesson 4 – Use the cases as history lessons. Take this case as a salutary lesson – it is however only one of many others.

Please do approach us if you are faced with any similar such issues.

Christopher Hill
Partner, Property Litigation team