Good news for tenants when exercising break options

For those tenants who were aware of the Capitol Park Leeds v Global Radio Services [2021] EWCA CIV 995 original High Court decision in this case, the recent Court of Appeal verdict will have caused a sigh of relief.

What happened?

Global were the tenant under the lease and exercised a break option. The option was conditional on giving vacant possession (”VP”) of the premises on the break date, a common condition that landlords require, but one that can be very onerous for tenants to comply with.

In carrying out their strip out works, Global removed a number of items (e.g. lights, floor finishes and radiators) that did not belong to them. They were either part of the original base specification of the premises or were the landlord’s fixtures.

The High Court agreed with Capitol that, as the definition of premises in the lease included “all of the fixtures and fittings at the premises whenever fixed, except those generally regarded as tenant’s or trade fixtures and fittings”, Global could not have given back possession of the premises once they removed the landlord’s fixtures that formed part of it.

The Decision

The Court of Appeal overturned the decision for a number of reasons:

1. VP is concerned with people, chattels (physical, moveable objects such as a table) and interests, not physical condition. In other words, if the tenant clears the premises of all of their possessions and ensures no one is, or has a right to occupy the premises, that is sufficient to exercise the break.
2. The original decision’s interpretation would make the requirements of the break condition inconsistent with the requirements of repairing obligations and yielding-up provisions.
3. If a landlord was concerned with the physical condition of the premises, they could include a condition requiring the repairing obligations to be complied with at the break date.
4. Even if the break were effective, the landlord would still have a remedy for breach of the repairing covenant.

What does this mean?

In our opinion, this decision provides a sensible outcome for two reasons.

1. The original decision would put tenants trying to comply with a VP condition between a rock and a hard place, particularly where they have taken assignments of leases and may not have the benefit of the original specification. On one hand, they cannot risk any of their items remaining at the premises, otherwise the break would fail. On the other hand, they cannot risk removing one or two items that may or may not be the landlord’s fixtures, otherwise the break would fail.
2. As the Court pointed out, break options usually allow the right to claim compensation for previous breaches of covenant to continue. That means that even if the premises are in disrepair, landlords do not suffer loss, and the tenant can exercise their break without a repairing obligation being implied into the VP condition: a fair outcome for both parties.

The Court’s final comments will no doubt reassure tenants for future disputes on interpretation of break conditions: just because the conditions of a break clause must be strictly complied with by a tenant, it does not mean they must be strictly interpreted against a tenant.

VP conditions are onerous for tenants, so the decision not to make them more difficult to comply with will be a welcome relief. For landlords, it demonstrates the importance of considering what will be important to them come the break date and focusing on those requirements if they wish to impose conditions.

For further advice on this, please contact one of our property disputes law experts below.