Landlord and tenant – Break clause – Commercial lease – Appellant tenant purporting to exercise break clause in lease – Break clause including condition that appellant give vacant possession of premises – Premises defined as including original building and landlord’s fixtures – Appellant stripping out features of property and/or fixtures – High Court making declaration that lease continuing – Appellant appealing – Whether appellant giving vacant possession in accordance with break clause – Appeal allowed
The respondent was the landlord of 1 Sterling Court, Capitol Park, Tingley, Leeds, a three-storey modern commercial unit constructed in 2000. By a lease dated 4 March 2002, the property was demised to a company for a term of 24 years from 12 November 2001. In June 2014, the appellant took an assignment of the lease. By clause 10, the appellant had the right to determine the lease if, amongst other things, it gave vacant possession of the premises to the respondent on “the relevant tenant’s break date”. The premises were defined as including the original building on the property and the respondent’s fixtures, whenever fixed.
The appellant commenced dilapidations work and stripped out significant elements of the base build and landlord’s fixtures. It subsequently decided that the property was surplus to requirements and stopped work, hoping to negotiate a settlement and surrender with the respondent. When the parties failed to reach agreement, the appellant purported to exercise the break clause by giving written notice to terminate the lease on 12 November 2017 and returning the keys to the respondent.
The respondent argued that, in returning the property minus those elements and/or fixtures which had been stripped out, the appellant was not complying with the condition to give vacant possession of the premises, as defined. The appellant argued that it had given vacant possession and thereby complied with the condition, because it left the premises empty of people and chattels so that the respondent was able to assume and enjoy immediate and exclusive possession and control of the property.
The High Court held that the lease continued because the appellant had failed to give vacant possession of the premises in accordance with the break clause: [2020] EWHC 2750 (Ch); [2020] EGLR 38. The appellant appealed.
Held: The appeal was allowed.
(1) Vacant possession conventionally involved a trilogy of people, chattels, and interests. Of itself, an obligation to give vacant possession referred to giving back the property in question free of people, chattels and interests, not to its physical condition: Goldman Sachs International v Procession House Trustee Ltd [2018] EWHC 1523 (Ch); [2018] L&TR 28 considered.
It was not uncommon for a break clause to be expressed to be conditional on the tenant having observed and performed covenants in the lease. However, in the present case, the parties had chosen not to provide for any such requirement in clause 10, nor even to say that the tenant must have fulfilled its repairing obligations under the lease. In that respect, there was a telling contrast between clause 10.1.4 and the yielding up provision of the lease, which stipulated that the premises had to be yielded up with vacant possession “in a state of repair condition and decoration which is consistent with the proper performance of the tenant’s covenants”. The fact that clause 10.1.4 made no mention of repair or condition lent support to the appellant’s case that clause 10.1.4 was not concerned with such matters.
(2) The respondent’s interpretation of clause 10.1.4 would have implications which the parties were unlikely to have intended and which would run counter to business common sense. For example, the tenant could exercise the break clause notwithstanding the fact that the building had been allowed to fall into a dreadful state of repair and become unlettable, but could not do so if a more than minimal number of ceiling tiles were missing, regardless of whether the deficiency could be said to be the tenant’s fault.
The approach to clause 10.1.4 espoused by the appellant did not leave the landlord without a remedy for deficiencies in the building. Clause 10.3 specifically stated that termination under clause 10 was to be without prejudice to any right of action in respect of any previous breach of covenant or condition. It would thus be open to the landlord to recover compensation from the tenant for, for instance, failure to repair in accordance with clause 3.3.
(3) In the context of clause 10.1.4, the “premises” should be understood to refer to “the premises as they are from time to time”. Such an interpretation was consistent with the fact that the definition of “premises” encompassed “all fixtures and fittings at the premises whenever fixed” and so extended to fixtures and fittings fixed after the commencement of the lease which at the relevant time were at the premises. What “premises” comprised was not therefore finally settled at the point at which the lease was concluded: Ponsford v HMS Aerosols Ltd [1979] AC 63 and Peel Land and Property (Ports No.3) Ltd v TS Sheerness Ltd [2014] EWCA Civ 100, [2014] L&TR 20
The fact that the conditions prescribed in a break clause had to be strictly complied with did not mean that the clause had to be construed strictly or, in particular, adversely to the tenant. A tenant wishing to exercise a break clause had to comply fully with whatever conditions had been attached to the exercise of the clause, but it did not follow that the conditions should be interpreted so as to favour the landlord: Siemens Hearing Instruments v Friends Life Ltd [2014] EWCA Civ 382, [2014] L&TR 27 followed.
(4) In all the circumstances, construing it in the context of the lease as a whole, clause 10.1.4 required the tenant to return the premises as they were on the break date free of the trilogy of people, chattels, and interests. On that basis, the appellant’s exercise of the break clause was effective and the lease terminated on 12 November 2017. Although the building might have been left in a dire state, that did not preclude the valid exercise of the break clause and the respondent’s remedy was to seek compensation for whatever loss it might have suffered.
John Male QC (instructed by CMS Cameron McKenna Nabarro Olswang LLP) appeared for the appellant; Joanne Wicks QC (instructed by DWF LLP) appeared for the respondent.
Eileen O’Grady, barrister
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