The tenant of a 24 year lease of a three storey modern commercial unit served notice to exercise the break clause under their lease.
The tenant removed fixtures and features (including ceiling tiles, lighting and heating) which were landlord's fixtures and fittings under the lease and not required to be removed to comply with the reinstatement provisions. However, the work had been unilaterally stopped without the items being replaced when the tenant tried to negotiate a financial settlement instead. The tenant returned the keys on the break date with the premises in this condition.
The High Court decision
During the trial, the landlord argued that the tenant's removal of the fixtures had resulted in the premises being handed back without vacant possession as too much had been removed. The landlord successfully argued that the premises which were handed back were substantially less than "the Premises" defined in the lease. The definition for "the Premises" included "all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s or trade fixtures and fittings…" and this prevented the tenant from handing back an empty shell of a building.
The tenant's counter argument was that vacant possession required returning the premises free (or vacant) of people, things and legal interests which it had done, despite any additional breach of the repair covenant.
The High Court held that the tenant's removal of the landlord's fixtures was the kind of outcome the landlord had been guarding against when it adopted the specific definition of "Premises" in the lease. Further, the High Court held that the physical impediment to the landlord's use of the property as a result of its shell condition meant that it had not been returned with vacant possession.
The Court of Appeal decision
The Court of Appeal has overturned the decision of the High Court holding that a condition for vacant possession requires the tenant to return the property free from people, things and legal interests and is not concerned with the physical condition of the property. The Court of Appeal further held that the break clause in the lease was not conditional on the tenant having observed and performed any covenants in the lease.
The landlord maintained its argument that the tenant had failed to comply with the break clause as a result of the definition of "the Premises". It was held that this interpretation of the lease would undermine business common sense as the landlord could recover compensation from the tenant for breach of repair separately. The "Premises" should be interpreted to mean the premises as they were from time to time and that is what had been handed back. The Court held that a tenant seeking to exercise a break clause must comply strictly with any conditions set out in the lease but those conditions should not necessarily be interpreted to favour the landlord.
Although this decision might encourage tenants to adopt a "strip it out if in doubt" philosophy, the Court of Appeal has taken a pragmatic and commercial decision based on what they perceive as business good sense. The landlord still has a claim for breach of repair but cannot frustrate the break clause in what was an extreme example of stripping out.
Authored by Millie Lloyd-Williams.