Break Clauses in Commercial Leases – What Does ‘Vacant Possession’ Mean?
22 Sep 2021
Commercial Landlord & Tenant, Lease Extensions, Real Estate
Commercial leases frequently stipulate that premises are to be handed back to the landlord ‘with vacant possession’ – but what exactly does that mean? The Court of Appeal pondered the issue in a case concerning an office block that was stripped back almost to the walls prior to the tenant’s departure.
Before it purported to exercise a break clause in the block’s 24-year lease, the tenant removed almost all fixtures and fittings, including ceiling tiles, window sills, pipework and floor finishes. Some of the features stripped out formed part of the original base-build of the premises and were either the landlord’s property or elements of the building itself.
After the landlord launched proceedings, a judge found that the break clause had not been validly exercised and that the lease therefore continued in force. The building having been left in a dysfunctional and unlettable state, the premises handed back by the tenant were considerably less than the premises defined in the lease. The stripped-out condition of the building posed a major impediment to the landlord’s use of the premises and the tenant could not, therefore, be said to have given up vacant possession.
In upholding the tenant’s appeal against that outcome, the Court found that the landlord’s interpretation of the break clause had implications that the parties were unlikely to have intended and that ran counter to business common sense. A situation would arise where the tenant would be able to validly terminate the lease if it handed back the premises in a dreadful state of repair, but not if a more than minimal number of ceiling tiles or other original features were missing, regardless of whether the deficiency was the tenant’s fault.
The landlord argued that, if the tenant’s interpretation were correct, it would have been able to exercise the break clause if it had demolished the building altogether, leaving a bare patch of earth. The Court, however, noted the improbability of such a scenario. The tenant had validly exercised the break clause in that it had, in accordance with the lease, handed the premises back to the landlord free of people, chattels and third-party interests.
After ruling that the lease had terminated on service of the break notice, the Court noted that the landlord was not left without a remedy. If it could establish that the tenant had, by stripping out the premises, breached repair or other covenants in the lease, it would be entitled to compensation.