Clarification on ‘vacant possession’ break conditions

Capitol Park Leeds PLC (1) Capitol Park Barnsley Limited (2) v Global Radio Services Limited

The Court of Appeal has clarified that removing landlord’s fixtures will not prevent a tenant meeting a break condition of providing “vacant possession”.

The tenant, Global Radio Services Limited, sought to exercise its break option in a lease of a broadcasting studio in Leeds. As is often the case, the break option was subject to a number of conditions precedent. One of the conditions was that the tenant provided “vacant possession” on the break date.

The tenant carried out an extensive strip out process removing numerous items which were part of the original base build and belonged to the landlord (ceiling grids, ceiling tiles, fire barriers, boxing to columns, floor finished, window sills, fan coil units, ventilation duct work, pipework connections, office lighting, smoke detection system, emergency lighting, radiators, heating pipework, floor boxed, ceiling void small power and sub mains cabled). Those items were not reinstated, the tenant hoped to reach a financial settlement before the break date and did not have time to reinstate the items which had been removed.

Crucially for the tenant, the break condition only referred to providing “vacant possession” and did not refer to compliance with other tenant obligations in the lease.

The Court followed the traditional test of vacant possession meaning returning a property (as it stood on the break date) without:

• people;
• chattels; and
• legal interests (such as sub-leases).

The Court stated that the physical condition of a property was not part of the test of vacant possession because it would present a number of unintended consequences. For example, a tenant would be unable to satisfy a vacant possession condition if the property was damaged by an insured risk and not reinstated by the landlord in time.

While the landlord could not frustrate the break option, it could pursue a dilapidations claim regarding the missing items (the lease contained typical wording in a separate clause to the break option that the tenant was to return the property with vacant possession and to have complied with the tenant’s obligations in the lease).

Vacant possession conditions are becoming less prevalent in new leases, however occupiers should keep the following in mind:

• Interrogate any conditions precedent to a break option at the earliest possible time to ensure there is a clear understanding as to what is required. Where necessary/possible, seek amendments to heads of terms and draft documents.
• Leaving behind chattels/tenant fixtures in the property can result in vacant possession not being given. If in doubt, clearing items from the property is likely to be the best option to ensure the condition is complied with.
• When agreeing to take space subject to a landlord obtaining vacant possession, consider including a clear definition of what is expected by the parties.

In light of the decision landlords should consider:

• Early advice from a dilapidations surveyor to put the tenant on notice of its obligations when returning the property;
• Ensuring any new break clauses include set parameters of what must be left in the property at lease end (avoiding void periods while landlord’s fixtures are reinstated).

Will Leney is a Senior Associate in our Property Litigation team.