UK & Europe
On 5 July 2021, the Court of Appeal overturned a first instance decision which found that a tenant had failed to exercise a break clause effectively due to them leaving the property in a state of substantial disrepair. Whilst the property may have been left empty, it was devoid of essential fixtures and fittings. The trial judge therefore found that the break was purportedly exercised in respect of a property which no longer satisfied the definition of ‘the Premises’ in the Lease, thereby meaning that the Tenant had failed to give vacant possession of the same.
On appeal, a single issue was identified: whether the Tenant’s removal of essential fixtures and fittings meant that it did not give vacant possession of the Premises to the Landlord within the meaning of a break clause. The precise wording of any break clause is always key to its valid operation. The relevant wording in this case was a familiar one as follows:
“The Tenant may terminate this Lease on either [12th November] … 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”
The case therefore turned on the correct construction of clause 10.1.4.
The Landlord maintained that the “Premises” to be returned under clause 10.1.4 extended to the original building and to the Landlord’s fixtures, whenever fixed to the “Premises”, subject only to replacement of any items in accordance with the covenants in the Lease unless de minimis. Here, the Tenant had entirely removed and not replaced parts of the “Premises” and, it was submitted, it accordingly failed to comply with clause 10.1.4 and, hence, in its exercise of the break clause. It was returning different “Premises”.
In contrast, the Tenant argued that clause 10.1.4 is not concerned with the physical state of the “Premises”, but with whether the Landlord is recovering it free of “people, chattels, and interests” – quoting Nugee J in Goldman Sachs International v Procession House Trustree Ltd  EWHC 1523 (CH). Contrasting clause 10.1.4 with the yield up covenant in the Lease which, unlike clause 10.1.4, requires “a state of repair condition and decoration which is consistent with the proper performance of the Tenant’s covenants”. This was not a requirement of the break. It was further argued that the Landlord’s interpretation of the clause would run counter to business common sense and give rise to anomalous and unfair consequences which the parties cannot have intended. For instance, what if a third party removed or significantly damaged part of the Premises unbeknown to the Tenant just prior to the break date? The “Premises” should be understood in the context of clause 10.1.4 to be “the Premises as they are from time to time”.
The Court of Appeal agreed with the Tenant’s arguments that vacant possession does not refer to the physical condition of the property in question. It was noted that it has not been uncommon for a break clause to be expressed as conditional on the tenant having observed and performed all the covenants in the lease; in the present case, however, there was no such obligation. Instead, the Landlord still had a remedy under the Lease, which specifically stated that termination under the break was to be without prejudice to any rights of action in respect of any previous breach of covenant or condition. Clause 3.3 of the Lease provided for the Tenant’s obligation to keep the Premises in repair.
Looking at the issue in terms of business common sense , the Court highlighted the anomalous consequences of the Landlord’s interpretation of ‘the Premises’: “Supposing that an intruder caused damage the day before the break date, the Lease would still terminate whatever the extent of the damage unless it happened to involve, say, loss of a fixture. In that event, if the fixture remained somewhere in the building, it might possibly be suggested that the tenant could still give vacant possession of it, but there could be no question of its doing so if the intruder had dumped the item in the street.”
A number of previous well established landlord and tenant decisions in the areas of rent review and alterations also proceeded on the basis that ‘the Premises’ should indeed be understood as “the Premises as they are from time to time”.
The judgment highlights the great care with which break clauses – and break conditions – should be drafted and complied with. In the absence of very precise and express wording to the contrary, a break clause must be taken to require a tenant simply to return the premises as they are on the break date, regardless of its state of disrepair, provided it is free of the “trilogy of people, chattels and interests” and notwithstanding that it might be in a dire state. A landlord’s remedy is to seek compensation for whatever loss it may have suffered.