Reed Smith Client Alert

In the current climate, tenants exercising break rights is a subject most landlords would like to avoid, since the prospect of receiving premises back early is not a welcome one.

Authors: Katherine A. Campbell

Many break clauses in modern leases provide that to be validly exercised, rent has to be paid up to the date of the break and vacant possession of the premises needs to be given. Gone are the days when tenants had to “substantially” or “materially” comply with all the tenant covenants in the lease in order to exercise their break and even the concept of vacant possession is now often superseded by a provision to leave the premises “free from occupiers and encumbrances”.

The recent case of Capitol Park Leeds plc v Global Radio Services Limited is an example of exactly why leases have moved away from requiring vacant possession upon exercising a break right. Once you have to contend with a concept as inexact as “vacant possession” itself heavily laden with past baggage, the fact is that an argument is sure to brew up; which is exactly what happened here, in a three storey commercial unit in Leeds.

The tenant sought to exercise a right to break the term of the lease as the premises were superfluous to its needs. The notice was validly served, but the break clause was conditional upon giving “vacant possession of the Premises to the Landlord on the….break date”. Importantly, “Premises” were defined as the property and “all fixtures and fittings at the Premises whenever fixed” (excluding tenant’s fixtures) and all additions and improvements.

Following some protracted (and disputed) dealings between the parties regarding terminal dilapidations and reinstatement, the tenant elected to strip out a number of items from the premises including fan coil units, pipework, ventilation duct work and floor and ceiling finishes in order to achieve a strip back to shell condition. In terms of dilapidations liability this may have been a good plan. In terms of the exercise of the break right, it handed an argument to the landlord that vacant possession of “the Premises” had not been given. By its action of stripping out the landlord’s fixtures and fittings, the landlord argued that the tenant had not handed back the Premises, but something less than the Premises.