Break clauses allow a party to a lease (typically the tenant) to bring the lease to an end before expiry of the fixed term. The break clause might require some sort of action to be taken, such as payment of all rent and giving vacant possession of the premises to the landlord. Where a party fails to comply with the conditions of a break it will be ineffective, and the lease will continue. 

See our top ten tips for tenants dealing with serving a break notice here.

The recent appeal decision in Capitol Park Leeds Plc v Global Radio Services Limited should act as a cautionary warning to tenants who focus on "doing a deal" instead of satisfying break conditions, leading to uncertain, protracted and costly litigation. 

The case at first instance

The tenant held a lease of business premises for a term of 24 years, due to expire on 11 November 2025. On 15 February 2017, it served a break notice upon the landlord to terminate the lease on 12 November 2017. One of the conditions of the break required the tenant to give vacant possession of the premises to the landlord on the break date.

Prior to the break date, the tenant had stripped out various features in the premises, including 17 original items such as radiators, sub mains cables, window sills and the air conditioning system.

The landlord argued that by returning the premises to it minus these elements and fixtures, the tenant had failed to give vacant possession of the premises.

The tenant raised two arguments: 1) that these were issues to be dealt with in a dilapidations context after the event, which did not impact on its ability to give vacant possession; and 2) the landlord had agreed a halt to any works, because a cash settlement was to be agreed. It, therefore, could not now renege on that agreement.

What is vacant possession?

The obligation on a tenant to give 'vacant possession' is said to be threefold: return the premises to the landlord free of people, possessions and legal interests (such as sub-tenancies). We'll call this the 'PPI standard'.

The court said that there were two possible tests it could adopt when looking at whether the PPI standard had been met: 

1. (Subject to the rule that trivial matters will not apply) has the tenant left property in situ? If so, it will not give vacant possession, because the act of doing so is a claim to a right to use the premises.

2. Does a physical impediment exist, which substantially prevents or interferes with the enjoyment of the right of possession of the premises, or a substantial part of it?

    The difficulty for the parties and the court in this situation was that previous cases had dealt only with situations where a tenant left items behind; and, that these two possible tests did not assist the court in circumstances when items were taken away by the tenant.

    The High Court decision

    The first test simply did not apply to the facts of the case so, the court looked to the second test. In finding that the second test had been met, the court said that the physical condition of the premises returned by the tenant (i.e. without the 17 offending items) was such that there was a substantial impediment to the landlord’s enjoyment of the premises or part of it. Without the 17 items the tenant had removed, the landlord could not fully enjoy the premises.

    Of the tenant's alleged agreement with the landlord to halt works and find a cash settlement, the court said that it preferred the evidence of the landlord that no such agreement had been reached. There was nothing in writing. If such an agreement had been reached, it would be reasonable to expect the tenant to have referred to it in communications after the meeting. But, the tenant had not done so, until it was challenged on the efficacy of the break.

    The Appeal decision

    On appeal by the tenant, the High Court decision was overturned on the following grounds:

    • The requirement to give vacant possession did not relate to the physical state of the premises, rather its concern was whether the landlord was recovering free of 'people, chattels and interests'. 
    • Whilst the yield up provisions within the lease made reference to the state and condition which the premises needed to be returned in, the break clause did not. This supported the tenant's position, that the condition of the premises did not impact its ability to break.
    • The landlord's interpretation would have had implications which neither party was likely to have intended and which conflicted business common sense, including an inconsistency with the yield up provisions if the premises were damaged by an Insured Risk.

    The state and condition were not, therefore, relevant when considering whether the premises had been delivered up with vacant possession. The test to be applied was simply whether the landlord was recovering the premises free of 'people, chattels and interests' .

    The tenant was deemed to have properly operated the break clause. For any losses suffered due to the state and condition of the premises, the correct recourse would be for the landlord to seek compensation.

    What to take from this?

    The tenant's decision to pursue only a negotiated settlement rather than focus on compliance with the break conditions, allowed the clock to run down to the break date, leaving the tenant with no time to change its strategy or obtain independent determination of the issue. 

    The facts of Capitol Park should act as a salutary lesson to both commercial landlords and tenants of the importance of seeking early, dispute-avoidance legal advice about how to break a lease and what to do if there is a dispute.

    If you are a tenant looking to break your lease or you are a landlord who has received a tenant break notice, or you have any concerns or questions about the matters raised in this blog, please do not hesitate to get in touch with our Real Estates Disputes team or your usual Brodies' contact.

    Contributors

    Lucie Barnes

    Partner

    Catherine Cross

    Senior Solicitor