15 January 2021
RED alert - Winter 2021 – 3 of 7 Insights
With a decision that has surprised many in the property industry, the High Court has held that a tenant's failure to reinstate fixtures and fittings amounted to a failure to give vacant possession of a property to the landlord. Previous cases on the subject have largely concerned allegations that tenants have failed to remove people, chattels or subsisting legal interests from a property, but in this case all of these had been removed. Nevertheless, the Court held that tenant had stripped out substantial parts of the premises, which left it "dysfunctional and unoccupiable". Permission to appeal the decision has been granted and we will report further if the appeal proceeds.
The claimant (the Landlord) was the owner of commercial premises in Leeds let to the defendant radio company (the Tenant). After taking occupation of the premises, the Tenant conducted significant works to strip out a number of fixtures and fittings. Items removed included ceiling grids/tiles, lighting, radiators and electrical equipment.
The Tenant's lease was due to expire in 2025 but the Tenant sought to exercise a break option to terminate the lease eight years early, in 2017. As is often the case, the break option was conditional, amongst other things, on the Tenant giving "…vacant possession of the Premises to the Landlord on the relevant Tenant's Break Date." Under the terms of the lease, "Premises" had a broad definition, including "…all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant's or trade fixtures and fittings, and all additions and improvements made to the Premises…".
As the break date loomed, the Tenant commenced works to reinstate the premises. However, hoping that it might complete a commercial deal with the Landlord to avoid completing the works, it stopped work. Unfortunately a commercial deal was never completed and the break date passed.
The Landlord sought a declaration that the Tenant had failed to comply with the vacant possession precondition because much of the premises had been stripped out, leaving it largely unusable. As a result, the Landlord argued that the Tenant had not given back "the Premises" as defined in the lease.
It is well known that preconditions to break options must be complied with strictly and there are only limited cases where the Courts have allowed any leeway in this regard. Much of the caselaw concerning giving vacant possession centres on whether any chattels have been left at the premises that would substantially impede the landlord's enjoyment of the property, if left in situ. The Landlord sought to extend this rationale, as the result of the Tenant's actions was largely the same, i.e. the property could not be enjoyed.
The Tenant accepted that failing to reinstate the premises may have constituted a breach of the dilapidations covenants in the lease. However, it argued that these covenants were not relevant to the break option because it had given up possession of the premises to the Landlord. It argued that the purpose of the precondition was to give up a property "…free of people, free of chattels, and free of legal interest" rather than to "set a trap".
Although there was no authority for a situation where a Tenant had left premises devoid of essential fixtures, the Court sided with the Landlord and made a declaration that the precondition to give vacant possession had not been complied with.
The Court noted that the starting point when considering the correct interpretation of a lease should be its written terms. In this case, the Court considered that the definition of "Premises" in the lease was somewhat unusual, in that it included specific reference to both the building itself, and the fixtures and fittings. It concluded that these words had been agreed for good reason, as the removal of the items concerned left the building vulnerable to deterioration and made a lengthy void period before reletting more likely. In the circumstances, the Tenant had given back substantially less than "the Premises" to the Landlord.
Although the Court noted that the case was of an "exceptional" nature, it held that "the physical condition of the Property was such that there is a substantial impediment to the Landlord's use of the Property, or a substantial part of it". This amounted to much the same problem faced by landlords whose property had been left full of unwanted chattels, so vacant possession had not been given and the lease would therefore continue.
There is a simple attraction to the notion that "vacant possession" should, broadly speaking, impose an obligation to remove people, objects and legal interests. Even if this case is expected to be exceptional, there is now a concern that an obligation to give vacant possession may extend into areas of dilapidations law that were previously unrelated. As the impact of the pandemic bears down on the economy, landlords may find scope to argue related points when attempting to defeat tenant breaks. Even if the decision is successfully appealed, tenants will do well to try to avoid unusual definitions of "premises" when drafting their leases.
by Saleem Fazal
by Emma Archer
by Emma Archer
by multiple authors