A break clause can be included in a fixed term lease and can be expressed as exercisable by either the Landlord or the Tenant, or both. The right to break may arise on an agreed fixed date, any time after a specified date or at any time throughout the lease term (known as a rolling break). A break clause provides the party with the benefit of the right to break the opportunity to determine the lease on the break date should that party wish to do so. Whether or not a break clause is included within a lease is essentially a matter of negotiation between the parties and will depend on a multitude of factors including the respective bargaining position of the parties and the current economic climate.
Conditions
A break clause may specify conditions for the right to break which must be strictly performed. The Code for Leasing Business Premises in England and Wales 2007 recommends that the only pre-conditions to tenants exercising a break clause should be that they give up occupation, the main rent is paid up-to-date and there are no continuing subleases. In reality, Landlords will often try to impose more onerous conditions which should be resisted by the Tenant who could risk losing their right to break due to trivial breaches. A typical condition imposed by Landlords which is non-Code compliant is the requirement to give vacant possession which is the focus of this article. This is our first update regarding break clauses and further updates will be produced in due course regarding what is meant by ensuring the rent is paid up-to-date and compliance with tenant covenants.
What is meant by ‘Vacant Possession’?
In the case of John Laing Construction Ltd v Amber Pass Ltd, the Tenant had vacated the property by the time the right to break was exercised but left behind security measures intended to protect the property. The Landlord argued that these security features, along with the Tenant’s failure to offer up the keys, evidenced that the Tenant had not yielded up the property with vacant possession. The High Court held that in the absence of any special processes prescribed by the lease, the Tenant simply needed to demonstrate a manifest and unequivocal intention to terminate the lease and the Landlord must have been able to occupy the property without difficulty. It was further held that yielding up did not require the Tenant to undertake specific acts such as handing over keys or removing chattels as these were not preconditions to yielding up the property. In this particular instance, due to the security problems at the property the existence of security features did not constitute a hindrance or prevent the Landlord from taking up occupation of the property. The High Court therefore held that the Tenant had properly yielded up the property.
The position was somewhat different in the case of NYK Logistics (UK) Ltd v Ibrend Estates BV. Here, the Tenant was not obliged to carry out repairs as a condition of the break clause but did so to avoid a dilapidations claim for damages. The Tenant failed to finish repairs by the break date and two workmen remained at the property following the break date to complete the repairs. The Tenant also employed a security guard for a further week following the break date. The Court of Appeal held that the Tenant failed to give vacant possession and should have given vacant possession by midnight on the break date. The Court gave some practical guidance as to what is meant by the term ‘vacant possession’ and stated that the property must be empty of people; the purchaser must be able to enjoy immediate and exclusion possession, occupation and control of the property; and the property must be empty of chattels which would hinder or interfere with the enjoyment of the right of possession of a substantial part of the property.
The final and most recent case law on this area is Riverside Park Ltd v NHS Property Services Ltd. In this case, the Tenant installed internal non-structural partitioning. The Landlord claimed that the Tenant failed to give vacant possession on the break date as the partitions had not been removed. The Tenant argued that it was under no obligation to remove the partitions as they were fixtures although they were entitled to remove the partitions if they wished to do so. In the alternative, the Tenant argued that if the partitions were chattels, their presence did not substantially prevent or interfere with the Landlord’s right of possession or enjoyment of the property. The High Court found in favour of the Landlord and held that the Tenant had not validly exercised its right to break. The Court held that the partitions were chattels on the basis that the configuration was unique and resulted in a series of small offices which was of benefit to the Tenant rather than an improvement to the property per se. The Court held that on the facts the partitions formed an impediment which substantially prevented or interfered with the Landlord’s right of possession.
Conclusion
The inclusion of a break clause in a commercial lease does not mean that the party with the benefit of it will automatically have the right to terminate the lease on the break date. A break clause will include conditions which must be strictly performed in order to exercise the right to break and there is no limit on the number of conditions which may be imposed. A break clause will be strictly construed by the Court. With particular reference to the condition to yield up with vacant possession, a Tenant should adopt a cautious approach and ensure that everyone is moved out of the property on the break date, including security personnel. It would also be advisable for the Tenant to contact the Landlord or Landlord’s agent on the break date to explain that it is vacating and that it will deliver the keys to the Landlord or Landlord’s agent on the same day to demonstrate a manifest intention to yield up in vacant possession. If the Tenant has altered the property in any way such as installing demountable partitioning then the Tenant should carefully consider the terms of the lease and any licence for alterations as these may contain provision for the property to be reinstated prior to the end of the term. In the event that this is not required, then the Court will consider whether the alterations purely benefit the Tenant or are an improvement to the property, and also whether the presence of the alterations has substantially prevented or interfered with the right of possession.
If you are considering exercising a right to break and require any advice on how to do so effectively, please contact our Commercial Property department who will be happy to provide further advice.
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