Unravelling the break clause trip hazards

22nd July 2021

Unravelling the break clause trip hazards

Nyree Applegarth, a Partner in the Higgs LLP Dispute Resolution team, looks at the problems that can arise when a tenant tries to employ a break clause.

Operating a successful break clause is always a significant concern for a tenant, especially in circumstances where it is imperative that they avoid ongoing financial liabilities.

The contentious issue between the parties is always whether the tenant has complied with the conditions of the break clause because a landlord is keen to keep a tenant on the hook. Arguments about whether a tenant can break its lease are litigated frequently. The Court of Appeal has, again, been tasked with looking at this and whether a tenant had successfully broken its lease in circumstances where it had removed various landlord fixtures (i.e. ceiling tiles, fan coil units, radiators and other fixtures) ahead of the lease expiry date.

The break option contained a precondition requiring the tenant to give vacant possession of the premises to the landlord. The premises included all fixtures and fittings whenever fixed. In the first instance decision, the court decided that because the tenant had removed various landlord fixtures it had not given back the premises as defined under the lease. The judge found that the physical condition of the premises was such that there was a substantial impediment to the landlord’s ability to be able to use a substantial part of the premises because fixtures had been removed and this meant the tenant had not delivered up vacant possession. The tenant had appealed to the Court of Appeal and argued that it was not part of the landlord’s case that there was a substantial impediment to the landlord being able to use the premises and that vacant possession had been given, and the preconditions satisfied. The Court of Appeal decided that vacant possession involves a trilogy of “people, chattels and interests” and is not concerned with the physical condition of the premises.

One of the Court of Appeal judges noted that there was a contrast between the tenant’s obligation to yield up the premises in a state of repair condition and decoration and the obligation to give vacant possession.

Ultimately, the Court of Appeal found that the landlord’s argument was contrary to common sense because, as per the terms of this lease, theoretically the tenant could have exercised the break clause successfully although it had left the premises in a poor state of repair, but not been able to successfully operate the break if a few ceiling tiles were missing.

The court also found that the word “premises” needs to be construed and, therefore, the fact that some items had been removed did not prevent the tenant from ending its lease. No doubt this decision will give some welcome relief to tenants who are seeking to comply with vacant possession preconditions at a time when many tenants are facing significant economic challenges.

Speak to our team today if you need any dispute resolution assistance.


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