Vacant Possession in Break Clauses

CS2 are currently representing numerous tenants in providing strategic advice concerning Break Clauses. They are a common sight in many leases and the quantity we are experiencing at present likely correlates with the start of the economic downfall nearly 10 years ago, due to the uncertainty at the time.

The lease will state various conditions to activate the break. Typical conditions will include the serving of 6 -12 months’ notice, the up-to-date payment of rents, handing back of keys and vacant possession. Seldom seen, but a more concerning condition, could be the full material compliance of Tenants’ lease obligations such as repair, redecoration, reinstatement and statutory compliance. The subject of full material compliance in break clauses has been widely reported as ‘unbreakable’ due to the high likelihood of misinterpretation and subjectivity.

The condition to offer up the premises with Vacant Possession is less onerous, requiring the tenant to remove all their chattels. However, recent case law has increased the potentially litigious nature of the vacant possession condition, as demonstrated by Riverside Park Ltd v NHS Property Services Ltd (2016).

This case represents the most poignant case from 2016 in dilapidations circles and has set new precedents in respect of the interpretation of vacant possession conditions in a break clause. To achieve Vacant Possession, the Tenant must offer up the Premises empty of chattels and people, with no legal obstacles, or anyone else having a right to possess, providing unhindered access for the Landlord.

NHS Property Services left their office premises empty on the break and satisfied all other conditions they believed to be required.  However, NHS Property Services undertook unauthorised alterations including the installation of demountable partitioning creating a ‘rabbit warren’ arrangement, as well as the installation of kitchenettes throughout. These remained in the premises on the break date.  As a result, the Landlord claimed that NHS PS, had not offered up the building with Vacant Possession due to the presence of these items and hindered the Landlord’s access to the Premises and their ability to re-let. The break option had therefore not been exercised and the lease continued.

The key point of the Riverside Park Ltd v NHS Property Services Ltd (2016) case is that the demountable partitions were held as being chattels and not fixtures because they were a tenant installation, not affixed to the structure and could be easily dismantled without injury to any part of the building. Furthermore, although a licence for alterations was in place, NHS had failed to satisfy their obligations under the licence to obtain necessary consent and approvals.

In our experience representing Tenants on numerous break options, the Landlord is not incentivised to do anything proactive to aid in the activation of the break clause and usually remains silent on the matter. In their eyes, if the break conditions are not met, their rental income will continue, so why would they? Successful activation of a vacant possession condition in a break clause requires careful consideration and failure to do so, will result in the significant monetary loss to the Tenant with the continuing payment of rents until the next break option, or natural lease expiry.

CS2 have represented numerous tenants on such matters and with assistance from the client’s legal representatives, provide a considered and comprehensive exit strategy to ensure all obligations are achieved.

Written by our Bristol Office based, Associate Director Richard Turton