26th June 2024

Exercising a Break Clause – The tenant’s requirement to give vacant possession

By Kate Andrews

What is a break clause?

Tenants, and landlords, can give notice to end a tenancy earlier than the contractual expiration date by exercising a break clause, if in existence in the tenancy agreement. This is a clause in a tenancy agreement which allows either party to terminate their lease early as long as all of the conditions of the break clause are met. In commercial leases, for a tenant to successfully exercise a break clause, all the conditions of a break clause must be complied with by the tenant.

One of the most common pre-conditions of a break clause is for the tenant to return the property to the landlord with vacant possession on or before the break date.

Whilst the requirement of vacant possession seems to be straightforward, in practice several tenants have failed to give vacant possession of premises with the result the tenancy will continue.

Capitol Park Leeds Plc v Global Radio Services [2020] EWHC 2750

The case of Capitol Park Leeds Plc v Global Radio Services [2020] EWHC 2750 is an example of a case which examined whether a tenant had complied with the conditions of a break clause.

The tenant (Global Radio Services) removed items such as ceiling tiles, windowsills, radiators and ventilation ductwork, leaving a shell of a building.

The High Court held the tenant had failed to comply with the conditional break clause requiring the tenant to give vacant possession of the premises, because the definition of the premises prevented the tenant from returning a shell of a building.

The tenant successfully appealed.

The specific provisions of this break clause

The Court of Appeal considered the provisions of the break clause as set out below:

“10.1 The Tenant may terminate this Lease on either [NB Insert day and month of term commencement date] day of 2009 and 2017 (‘Tenant’s Break Date’) if the Tenant

10.1.1 gives the Landlord at least six months and not more than nine months’ written notice to expire on the Tenant’s Break Date of its intention to do so

10.1.2 in respect of the first Tenant’s Break Date accompanies the notice with a payment equivalent to two years Rent then reserved and payable pursuant to this Lease plus any VAT that may be properly payable

10.1.3 has at the date of the notice paid the Rent and all other payments due under this Lease

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

10.2 The Landlord may in its absolute discretion and at any time expressly waive compliance with all or any of the conditions in clause 10.1

10.3 The termination of the Lease under this clause shall be without prejudice to any right of action of either party in respect of any previous breach of covenant or condition of this Lease by the other

10.4 The termination of the Lease under this clause shall be without prejudice to the right of the Landlord to demand from the Tenant the amount of any increase in the Rent for any period from a Review Date to the End of the Term together with any Interest which is due and payable on the increase where the Rent payable from that Review Date has not been determined or agreed by the End of the Term]”.

The Court of Appeal summarised the three elements for giving vacant possession to be the return of the property free of: (1) people;, (2) chattels; and (3) interests. The Court of Appeal considered the physical condition of the property was not relevant when determining whether vacant possession had been given or not.

The Court of Appeal held that even though “the building was left in a dire state […] that will not have precluded valid exercise of the break clause”. Instead the landlord (Capitol Park Leeds Plc)’s remedy is to seek compensation for any loss it may have suffered.

The Court of Appeal also held that although the break clause conditions must be strictly complied with, this: “does not mean that the clause must be construed strictly or, in particular, adversely to the tenant” and that: “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”.

Conclusion

The case gives comfort to tenants exercising break clauses in a commercial lease, especially during the current economic climate.

Whilst it is a question of fact as to whether the conditions of a break clause in a lease have been complied with, this case provides some clarity on the test for “vacant possession” in the context of a break condition, and on the requirements that a tenant exercising a break clause is required to satisfy to effectively terminate a lease.

The Hamlins Real Estate Disputes team has expertise in both commercial and residential matters and advises landlords, tenants and tenant groups. If you would like a conversation to find out how we might help you, please get in touch.

Exercising a Break Clause – The tenant’s requirement to give vacant possession

Have a question? Contact Kate

Have a question? Contact Kate

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