“Vacant Possession” - What is it & Why is it Dangerous?

A break clause/option is a clause in a Lease enabling either the landlord or the tenant or both to terminate that Lease before the end of the lease term.  So, for example, a lease for a term of 20 years might contain a break clause enabling that term to be “broken” i.e., terminated on the tenth and fifteenth anniversary of the term. 

Such clauses in theory offer greater flexibility to a Tenant for positive (outgrown space) or negative (business not performing) reasons and can also be attractive to a prospective buyer of the tenant’s business giving them options to rationalise a merged estate.  Many occupational organisations, particularly retailers have adopted a policy requiring break clauses in all of their leases.

Unfortunately, most break clauses contain trap door conditions designed to ensure that the break cannot be validly exercised as opportunistic, dare I say, unscrupulous Landlords have sought to incorporate such conditions into the break clause.  These conditions have proved to be a fertile source of litigation for many years and remain essentially a recipe for litigation, partly because the Courts have traditionally taken the view that any conditions within a break clause must be strictly performed.

As a matter of strategy, a tenant should wherever possible seek to minimise break conditions and ideally negotiate for an unconditional break, which would give teeth to the clause.  Typical conditions (or pre-conditions to exercising the break validly) required by landlords are: –

1. Service of notice;

2. Payments of rents;

3. Compliance with Lease covenants; 

4. Giving up “vacant possession” of the property;

5. Payments of a premium.

There are many variations and complications connected/arising out of these concepts/conditions and a huge volume of cases, which over the next few blogs I will look at but for today I should like to focus on the most recent case to be heard dealing with the concept of “vacant possession”.

“Vacant Possession” – What does it mean? 

Capital Park Leeds PLC & Capital Park Barnsley Limited -V- Global Radio Services Limited

On 17th June 2021 the Court of Appeal heard an appeal by Global Radio Services Limited against an earlier decision of the High Court.

Global had acquired a broadcasting studio in Leeds in 2014, which was held under a lease for a term of 24 years from November 2001, but which contained a tenant’s option to break in November 2017. The break was conditional amongst other things on the tenant giving the landlord “vacant possession” of the premises.  The premises were defined to include all of the landlord’s fixtures and fittings and additions and improvements.  Global gave notice to exercise the break and stripped out a number of items including ceiling tiles, radiators and lighting but had not refitted any of them. 

The landlord argued in the High Court that because of this Global had failed to give “vacant possession” of the premises, as required by the condition in the break clause.  The High Court Judge agreed with the landlord’s argument that the landlord’s use of the premises would be substantially impeded as it has received back from the tenant considerably less than the defined premises. 

Accordingly, the High Court Judge granted a declaration that Global had not delivered vacant possession thus the break was ineffective, the lease term was not broken and continued with Global consequentially remaining on the rent hook.  The key argument turned on the meaning of the premises and its physical condition.  Global appealed.

The Court of Appeal overturned the decision of the High Court and said that the fact Global had stripped out various fixtures and fittings and left the premises in such a state there was a substantial impediment to the landlord’s use did not mean it had failed to give “vacant possession”. In its judgment, the Court of Appeal said that “vacant possession” usually means returning the premises free of “the trilogy of people, chattels and interest” and did not refer to the physical condition of the premises.  Lord Justice Newey noted that the landlord had a remedy in respect of the state in which the premises had been returned and that was to sue the tenant for whatever loss it had suffered.

Crucially in this decision, the Court of Appeal went on to say that while previous case law has supported the view that conditions in a break clause must be strictly complied with, this does not mean that such clauses must be strictly construed or in particular adversely to the tenant.  As such, this decision represents a departure from the Court’s traditional approach and may be considered a move towards a more common-sense, pragmatic approach. 

Despite this, it appears the Judiciary remain uncertain as to precisely what “vacant possession” means and my advice to any tenant is, wherever possible, seek to remove any conditions let alone a condition of “vacant possession”, which a landlord may try to include in the Lease.

Next time around we will look at payment of rents.  It sounds fairly straightforward and a tenant might think this was in its control but its risk is as always in the detail!

The contents of this article do not constitute legal advice and are provided for general information purposes only.