Court of Appeal's key decision on tenant break rights

Tim Rayner, Joint Head of Corporate Occupiers and Real Estate Disputes at Irwin Mitchell, examines the decision which focused on tenants stripping out premises.

In recent years two cases in particular have been cause for real concern for tenants when seeking compliance with the obligation to give vacant possession as a condition of a break option. The first case is Riverside Park Ltd v NHS Property Services Ltd [2017] L. & T.R. 12 and the second has been the first instance decision in this case - Capitol Park Leeds Plc v Global Radio Services Ltd.

In both cases the break failed due to the failure to give vacant possession; in the first case the tenant did not remove enough (mainly partitioning) and in the second the tenant removed too much (see more below).

However tenants can now collectively give at least a partial sigh of relief because the second decision has been reversed by the Court of Appeal - in what might be considered a landmark judgment in the arena of break options.

In short, despite the tenant removing an extensive range of items from its premises (1 Sterling Court, Capitol Park, Leeds) which included features which had been part of the original base build specification and therefore landlord’s fixtures or perhaps elements of the building itself, the court of appeal found that the tenant had given vacant possession. The break was exercised.

Lord Justice Newey gave six reasons for the basis of his decision:

• Whilst it was accepted the premises were left in a dire state, the obligation to give vacant possession in this lease was not concerned with the physical condition of the premises but rather only the “trilogy of people, chattels , and interests”.
• The landlord argued that to give vacant possession the tenant must give back the “premises” which included both the building and all fixtures, whenever fixed to the premises (the tenant had removed parts of the premises).  The Judge rejected this as running counter to business common sense and likely to lead to unintended consequences such as if the premises had been destroyed by fire the tenant would have been unable to exercise the break. 
• The landlord’s interpretation above would conflict with the “insured risk” clause such that lease would be “internally inconsistent”.   
• Even if the break was successfully exercised the landlord retained the right to recover compensation for breach of its obligations.  In other words, whilst the tenant had successfully exercised the break despite the poor condition of the premises the landlord was not left without any remedy – it had a claim in damages for terminal dilapidations. 
• The “premises” should be understood to refer to “the premises as they are from time to time”.  The Judge found against the idea that what the premises comprise was settled at the point the lease was originally concluded. Based on this conclusion the Judge was able to say that the tenant had not removed part of the premises.
• Finally,  Lord Justice Newey said  “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, in particular, adversely to the tenant. A tenant wishing to exercise a break clause has to comply fully with whatever conditions have been attached to the exercise of the clause, but it does not follow that the conditions should be interpreted so as to favour the landlord.”

With the increase in flexible working many businesses will of course be considering their options in the context of potential downsizing. Break rights are perhaps the most obvious ‘unilateral’ option for those tenants and this case may give tenants some cause for cheer.

However break right conditions do remain highly risky endeavours and even on this narrow point tenants should still be cautious. Based on this decision they should carefully analyse the precise lease definitions and in particular those relating to “vacant possession” and “premises”, amongst others. And of course significant risks remain for tenants who do not remove enough and the break fails for the reasons set out in Riverside.

This article first appeared in CoStar