Landlord and tenant — Commercial premises — Termination of lease — Tenant wishing to exercise break clause — Tenant issuing notice of intention to terminate — Whether notice giving rise to valid exercise of tenant’s break clause — Claim dismissed
The claimant was the landlord of commercial premises that included three warehouse units occupied by the defendant under 10-year leases from January 2001. Each lease contained a break clause entitling the defendant to determine on 30 December 2004 on giving six months’ prior written notice. That right was subject to certain conditions, including the delivery up to the claimant of the entire premises with vacant possession on the expiry of the notice.
The defendant served break notices in June 2003. Discussions then followed concerning the defendant’s accrued liability for repairs and decoration under the leases. A settlement agreement, reached in October 2004, provided, inter alia, that in consideration of the payment of £172,000 the claimant would release the defendant absolutely from its liabilities, covenants and obligations, past and present, under the lease. The defendant covenanted to keep the premises in no worse a state and condition than they were in as at 24 August 2004, when a schedule of dilapidations had been produced.
The claimant subsequently claimed arrears of rent and service charges, contending that the break clause was not effective because the defendant had failed to deliver up the premises with vacant possession. It had left a large quantity of unwanted property inside the units, its personnel were still clearing the site after the notice period had expired and it had failed to surrender the keys to the premises.
The defendant argued that under the terms of the settlement agreement, the claimant was precluded from contending that the leases were still on foot since the claims had been compromised, including the operation of the break clauses. A full and final settlement had been reached and, therefore, the leases had been validly terminated.
Held: The claim was dismissed.
Applying the officious bystander test to ascertain the extent to which the terms of the break clauses had been modified, both parties would have agreed that this was not a case in which the defendant had chosen not to vacate the premises but to remain for a further seven years. The parties had agreed that the notices brought the leases to an end and that the sum paid to the claimant had been calculated on that basis.
It was not open to the claimant to resile from the agreed compromise. It was implicit in the terms of the settlement agreement that the break notices were to take effect and that the claimant had waived its right to rely on compliance with the provisions of the break clauses to defeat the effect of the notice.
Had it been necessary to decide the point, there were two possible tests for determining whether vacant possession had been granted. The first looked at the activities of the party giving up possession; if it continued to use the property, it could not give vacant possession. The second concerned the condition of the property itself and required that there should be no physical impediment to a party’s right to enjoy vacant possession: Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264, Norwich Union Life Insurance Society v Preston [1957] 1 WLR 813, Hynes v Vaughan (1985) 50 P&CR 444 and Royal Bank of Canada v Secretary of State for Defence [2003] EWHC 1479 (Ch); [2004] 1 P&CR 28 considered: John Laing Construction Ltd v Amber Pass Ltd [2004] 2 EGLR 128 distinguished.
In the present case, it appeared that the defendant had breached its obligation to give vacant possession since, on the evidence, it had continued to use the warehouse and the claimant could not have gone into occupation on the agreed date.
Derek Wood QC (instructed by Berwin Leighton Paisner) appeared for the claimant; Timothy Dutton (instructed by Druces & Attlee) appeared for the defendant.
Eileen O’Grady, barrister
