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The Court of Appeal has overturned the High Court's ruling in the case of Capitol Park Leeds Plc and Capitol Park Barnsley Limited v Global Radio Services Limited  EWCA Civ 995. The Court of Appeal confirmed that vacant possession requires returning the property free of people, chattels and interests, but the fact that a tenant had removed the landlord's fixtures, in this case, did not mean that the exercise of the break option was ineffective.
Vacant possession is a common condition required of a tenant when they leave their premises at the end of the term of their lease or through exercise of a break clause. The tenant must leave the property free of occupation of people and chattels such as furniture and stock. The tenant must make the property available in such a state so that the landlord can physically and legally control the property without substantial impediment. It is a question of fact and degree.
Capitol was the landlord of the commercial property, and Global was the tenant. The tenant exercised a break option in the lease to end the tenancy. A pre-condition of the break option required the tenant to give "vacant possession of the Premises to the Landlord [on break date]." The lease defined the Premises as including "all fixtures and fittings at the Premises whenever fixed."
At the end of the tenancy, the tenant removed fixtures from the property, which included ceiling tiles, ventilation ductwork and radiators. The fixtures were removed as part of dilapidations works required to be completed before the end of the tenancy. The intention was to replace the fixtures prior to handing back the property, but after running out of time to complete the works, the tenants offered a financial settlement instead of reinstating the fixtures.
The landlord argued that the Premises had not been given back with vacant possession in the state defined by the lease. The tenant argued that the property was free of people, chattels and interests.
The Judge at the High Court found in favour of the landlord – the break was not effective. The High Court determined that the physical condition of the premises amounted to a failure to give vacant possession. The decision was made based on the definition of the Premises in the lease, which included "all fixtures and fittings at the Premises whenever fixed". This would ensure that the property was not given back as an "empty shell" of a building that the landlord would not be able to occupy or let out.
The tenant was granted permission to appeal.
The Judge at appeal overturned the lower court's decision.
Lord Justice Newey declared that the issue was a matter of construction, and the question was whether the tenant's removal of fixtures meant that it did not give "vacant possession of the Premises" within the meaning of the relevant clause of the lease.
The Judge agreed with the tenant that vacant possession normally involves the trilogy of "people, chattels and interests". It is not concerned with the physical condition of the premises. The Judge also found that the landlord's argument was contrary to business common sense. The argument would allow a tenant to exercise a break option despite the premises falling into disrepair, as long as all the landlord's fixtures remained in place, no matter their condition.
The Court of Appeal noted that break option pre-conditions must be complied with strictly, but this does not mean that the conditions must be construed strictly or adversely against a tenant.
This case was decided based on its specific facts. Break options and whether or not they have been exercised correctly are often in dispute. Exercising break clauses ineffectively can be a costly mistake as a tenant will still be on the hook for rent and other covenants should they fail to comply with any conditions of a break clause. For a tenant, a lease with fewer break conditions means that there is less of an opportunity for a break to fail. Terms should be clearly drafted so that both parties are clear on what a tenant must do before they can break the lease. It is possible that over the next few months, as businesses begin to operate normally again, more landlords and tenants will try to exercise break options within their lease.