In May 2021 we wrote about the landlord friendly decision of Capitol Park Leeds Plc, Capitol Park Barnsley Limited v Global Radio Services Limited in which it was decided that the tenant had failed to give the landlord vacant possession of the premises by giving back an empty shell of the premises and had therefore not properly exercised the break clause.

That decision has now been reversed by the Judgment of the Court of Appeal in a much more tenant friendly decision.  The Judgment focuses on the construction of the break clause and a number of other clauses within the lease.

The lease provided that the break clause was exercisable in November 2017 so long as the tenant gave at least six months’ notice, had paid the rent to date and gave “vacant possession of the Premises to the Landlord on the relevant Tenant’s Break Date”.

The landlord argued that, as the definition of “Premises” included “all fixtures and fittings at the Premises whenever fixed…” and the fixtures and fittings had been removed, the tenant had failed to give vacant possession.

The Court of Appeal disagreed with this interpretation. It was found that “vacant possession” requires the premises to be returned free from people, chattel and legal interests; it does not relate to the physical condition of the premises itself.

Lord Justice Newey set out his reasoning as follows:-

  • It is not uncommon for a break clause to be expressed to be conditional on the tenant having observed and performed its covenants in the lease, for example its repairing covenants. However the break clause in this lease was not conditional on other tenant covenants having been performed. The fact that the break clause does not itself refer to the state of repair of the premises lends support to the case that the break clause is not concerned with such matters and they are to be treated separately.
  • The landlord’s interpretation of the break clause would have implications that the parties are unlikely to have intended and which would “run counter to business common sense”. For example, the tenant could exercise the break clause if the premises had fallen into a complete state of disrepair, but would be unable to do so if a small number of ceiling tiles were missing.
  • The lease also provides that the tenant is to keep the premises in repair “but excluding any damage or destruction by any of the Insured Risks…” and also to “Yield up the Premises to the Landlord at the end of the Term with vacant possession in a state of repair condition and decoration which is consistent with the proper performance of the Tenant’s covenants in this lease”. If the landlord’s interpretation of vacant possession is correct, it would create an internal inconsistency within the lease itself. The tenant would be unable to give vacant possession even if the disrepair was due to a breach of the landlord’s covenant, i.e. a failure to insure the premises.
  • The landlord is not without a remedy for the deficiencies in the building. The break clause specifically states that it is without prejudice to any right of action in respect of any previous breach of covenant, so the landlord is still entitled to compensation in any event.
  • The tenant successfully argued that the definition of “Premises” should be understood to refer to the “the Premises as they are from time to time” so extends to fixtures and fittings fixed after the commencement of the lease.
  • Finally, the fact that the conditions prescribed in a break clause must be strictly complied with does not mean that the clause must be construed strictly or adversely to the tenant. A tenant must comply with the conditions of the break clause fully, but it does not follow that conditions should be interpreted to favour the landlord.

This decision turned on the interpretation of the break clause itself and is a reminder to landlords to ensure that if a break clause is to be included in a lease, it should be sufficiently clear and precise. If a landlord wants to ensure that a tenant is unable to exercise the break clause without putting the property into repair, the clause must say so.

It is also a welcome decision for commercial tenants as the case confirms that, while it is essential to comply with the conditions of a break clause, an ambiguous clause should not automatically be interpreted to favour the landlord.

Finally, this decision also clarifies the meaning of vacant possession within a lease.  In summary, the Court will not be concerned with the state of the building but rather that the premises is free from people, chattels and legal interests.  Both landlord and tenant should obtain specialist advice on these points.

For further information please contact Shams Rahman or any member of the Property Litigation team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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