Vacant possession revisited - yet more expensive lessons for tenants in conditional breaks

Vacant possession revisited - yet more expensive lessons for tenants in conditional breaks

This article was included in the summer 2011 issue of Informer - the real estate newsletter.

There was yet another example of an expensive lesson learnt for a tenant in the Court of Appeal recently. In Ibrend v NYK Logistics, a tenant's lease was held to continue as the tenant had failed to properly exercise its break option.

The downfall in this case surrounded the tenant’s failure to provide vacant possession - this being an express condition of the break.

The facts

The tenant served its break notice and thereafter progressed plans for its staff to vacate the property and relocate its business. As part of this process, the tenant wanted to put the property into repair to avoid a dilapidations claim. In the months leading up to the break date, it liaised with the landlord about the works it needed to do - matters dragged on longer than hoped. By the break date, the works had started but had not quite finished (the tenant needed just a few more days). There was dialogue between the parties and the relationship was fairly amicable, so the tenant made the decision to finish off the works (after the break date) and complete the job. After all, the landlord did not seem to need the property and was quite relaxed about things.

It therefore came as a shock to the tenant when, a little while after the break date, the landlord changed its position and pointed to the fact that the break clause required vacant possession. Whilst the tenant's staff had vacated and all the tenant's belongings had all been removed, the landlord pointed out the tenant's contractors were on site in the days following the break date. This, it said, meant the premises were not vacant and so the lease continued.

The discussions between the parties leading up to the break date (and even shortly after) allowed the tenant to construct assorted arguments about how unfair this all was and that the break ought to be effective, but, as is often the case, these 'unfairness' arguments ultimately failed to add up to very much. Ultimately, the court agreed with the landlord. Vacant possession was not provided and the lease continued.

With the benefit of hindsight, the tenant's actions can easily be seen as naive, but you can understand a little more why it acted as it did when you look at the chronology. Nevertheless, the tenant's fundamental problem stemmed from the fact that it failed to appreciate this was a conditional break option which needed careful managing. Instead it treated the break as akin to leases ending through effluxion of time and decided to deal with the project by itself.

The case is a further reminder about how important it is to seek early legal advice when dealing with break options and demonstrates the problems which can occur if one does not. Please do let us know if we can assist.

Two additional points: For a number of reasons, vacant possession has proved increasingly difficult to work within the context of break options. The case presented the Court of Appeal the opportunity to give a ruling on its meaning. Although it did so (and this was of some assistance to legal practitioners), the facts of the case meant this opportunity was not as useful as it could have been. In the future, you should consider removing vacant possession as a condition of break options. The Code for Leasing Business Premises now recommends different wording in this regard (in large part due to the difficulties that vacant possession currently presents) - the proposed wording is that the tenant has (1) given up occupation and (2) terminated sub-tenancies. This is far clearer and much easier to comply with and is recommended.