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Court of Appeal: High Court decision on break clauses and vacant possession overturned in Capitol Park Leeds plc v. Global Radio Services Ltd [2021]

Insights / / London

This case concerns the thorny subject of what constitutes valid exercise of a conditional break clause by a tenant. At first instance, the High Court held that removing too many items from the premises, leaving them practically useless, did not constitute vacant possession, and that the break clause had therefore not been properly exercised, as it failed to comply with the lease definition of ‘the Premises’. On appeal, the High Court’s decision was overturned.

The facts:

The parties entered into a 24 year lease which contained the following provision:

The Tenant may terminate this Lease on [either of two specified dates] (‘Tenant’s Break Date’) if the Tenant –

[…]

10.1.4 gives vacant possession of the Premises to the Landlord on the relevant Tenant’s Break Date

As part of dilapidation works, the tenant began stripping the building of various fixtures and fittings including radiators, lights and ceiling tiles. After failing to negotiate a settlement and surrender with the landlord, the tenant instead served notice to exercise the break clause. The High Court described the state the tenant had left the building in as “an empty shell of a building which was dysfunctional and unoccupiable”.

The arguments:

The tenant relied on the argument that neither the definition of the premises nor clause 10.1.4 concern themselves with the physical condition of the property, so long as it is being returned to the landlord free from what is commonly referred to as the ‘trilogy of people, chattels, and interests’ (Sachs International v Procession House Trustee Ltd [2018] EWHC 1523 (CH)).

The landlord relied on the definition of the Premises in the Lease: what had been returned was not what was defined in the Lease. In fact, it fell substantially short of this description. The lease specified that  "all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings…" formed part of the definition of the Premises, and it was precisely these items that had been removed.

High Court decision:

At first, the High Court agreed with the landlord, reading the definition of the Premises as an attempt by the landlord actively and specifically to protect itself against unusable remains of a building being returned to it. It held that too much had been removed, and for a brief period prior to the Court of Appeal decision, provided an upper limit to the ‘strip it out if in doubt’ rule.

Court of Appeal decision:

The Court of Appeal overturned the decision based on two prevailing points:

  • the property must only be returned free from the ‘trilogy of people, chattels, and interests’ and is not defined by or concerned with the physical state of the property; and
     
  • the valid execution of the break option was not conditional on the tenant’s performance of covenants contained in the lease.

A tenant must still comply with any conditions and obligations outlined in the lease on a strict basis, but that must not be taken to favour the landlord in a situation where a break clause is being exercised by the tenant.

Further, upholding the landlord’s sustained argument that the tenant had failed to exercise the break option correctly was in danger of creating a commercial precedent that failed to acknowledge a landlord’s ability to recover compensation for breach of repair separately from any break clause issues.

Comment

Despite the careful drafting of the lease intended to protect the landlord, the Court of Appeal gave greater importance to upholding commercial pragmatism: as long as a tenant returns the property in the condition it was in on the break date, free of the trilogy of people, chattels, and interests, the physical state of the property is of little to no relevance. The landlord’s remedy remains as it would normally be, which is to seek compensation for any loss it has suffered as a result of breach of the tenant’s repairing covenants, and it should do so rather than attempting to pursue the route of frustration of the break clause.

This article was authored by Trainee Solicitor, Natalie Neil.

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