Vacant possession: Court of Appeal restores status quo

The facts of the case

The tenant of commercial premises sought to exercise a break right. One of the conditions of the exercise of the break right was that the tenant should give back "vacant possession of the premises" to the landlord. The tenant had, in fact, removed a number of landlord's fixtures and elements of the landlord's original build. The landlord argued that the tenant had not delivered vacant possession of the premises, as it had removed elements of the premises themselves.

The High Court decision

The High Court accepted the landlord's argument: 

The inclusion  within the definition of “Premises” of “all fixtures and fittings at the Premises whenever fixed (except Tenant’s fixtures)” and “all additions and improvements” meant that a tenant could not exercise its break option by handing back an empty shell of a building which was “dysfunctional and unoccupiable”.

The Court of Appeal decision

On appeal, the Court decided that the requirement to give back vacant possession of the premises did not relate to the physical condition of the premises. Rather, the question was the traditional one of possession of the premises: vacant possession requires giving back a property free from "people chattels and interests". Even though elements of the premises had been removed in this case, this did not impact on the tenant's ability to deliver vacant possession of them. If the parties had intended the tenant to have been prevented from exercising the break right due to defects in condition of the premises, they could have expressed this as a separate condition. Many leases do require tenants to comply with tenant covenants, including repair, as a prerequisite to a break right being exercised. In this case, the parties had chosen not to include such a requirement.

Practical implications

• Tenants will be reassured that an obligation to give vacant possession has the orthodox meaning of returning the premises to the landlord free of people, chattels and legal interests. A tenant will not be in breach of this particular requirement if parts of the premises have been removed.
• Whilst tenants must comply strictly with the terms of a break right, the Court will not necessarily construe these terms strictly against a tenant. In other words, a tenant seeking to exercise a break right must strictly comply with any preconditions to the exercise of that break right. But it will not follow that those conditions will be interpreted in the landlord's favour.
• From a tenant's perspective, it is of course preferable to avoid agreeing at the outset any conditions to the exercise of a break right, other than paying the basic rent and giving up occupation. Even though the Court has now restored the traditional meaning of vacant possession, there is still plenty of room for disagreement as to whether or not chattels have been left behind so as to prevent or interfere with the landlord's right of possession of the premises.