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16th November 2020

Vacant possession – how vacant is too vacant?

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In a recent case the tenant sought unsuccessfully to exercise a break clause in their lease. The break clause required them to return the property to the landlord with “vacant possession”. 

The tenant stripped the property back to a shell and removed items such as radiators, ceiling tiles, ceiling grids, fire barriers or lighting.  The landlord argued the break could not be exercised as they had not complied with the break condition requiring the property to be returned with vacant possession.

Whether vacant possession has been achieved is a question of fact. Vacant possession means there is no substantial physical impediment preventing the use of the property by the landlord. Usually the issue faced by the courts has been whether vacant possession has been achieved where things have been left behind, not where things have been taken away.

The lease set out that the property included all fixtures and fittings except those which are generally regarded as tenant’s or trade fixtures and fittings, and all additions and improvements. Due to the tenant’s extensive stripping out, the landlord argued the tenant had not returned the property as defined in the lease preventing vacant possession being given at the break date, whereas the tenant argued vacant possession had been achieved as the property had been handed back free of people, chattels and other interests.

The court ruled that vacant possession had not been achieved as considerably less than the property as defined in the lease had been returned and the physical condition of the property was a substantial impediment to the landlord’s use of it. The lease will therefore continue. At the break date the lease had a further 8 years to run, so the consequences for the tenant were substantial. Whilst the tenant has been given permission to appeal the decision, even if the decision is overturned, the tenant is still faced with the costs of compensating the landlord for stripping out the property in breach of the lease.

It is important to understand the break conditions in a lease and strictly comply with them. It is also important to understand the extent of the property that is required to be returned to the landlord. In this case the landlord and tenant had tried to reach agreement regarding the tenant’s liabilities, but the tenant through trying to limit their dilapidations liability by stripping out had given the landlord power to argue the break conditions had not been complied with.

No doubt there will continue to be contested break clauses, particularly in the current climate. Changes to working habits have led to tenants increasingly trying to exercise break clauses to consolidate space and reduce overheads. This case clearly illustrates how important it is to ensure all conditions are fully complied with so break clauses are successfully operated.  For advice on landlord or tenant matters please click here to email Sarah Baron.