Break clauses: A case for careful drafting
The Capitol Park Leeds Plc v Global Radio Services Ltd case has further highlighted the importance of the careful drafting of break options in commercial leases.
The break clause in this case was conditional on the tenant giving “vacant possession of the premises to the landlord on the relevant tenant’s break date.” The definition of ‘premises’ in the lease was arguably wide as it included fixtures and fittings “whenever fixed.”
Shortly after the grant of the lease, the tenant carried out significant work to strip out numerous fixtures and fittings at the property that included ceiling tiles, lighting, radiators and electrical equipment.
In anticipation of the break date, the tenant began to reinstate the premises but subsequently stopped in the hope that a commercial deal would be agreed with the landlord to avoid needing to complete the works. A deal, however, was never struck and the premises were returned to the landlord as an empty shell.
The High Court held that the property was “dysfunctional and unoccupiable,” rendering the exercise of the tenant’s break option invalid.
The Court of Appeal later overturned this decision on the basis that the pre-condition requiring the tenant to give vacant possession was not concerned with the physical condition of the premises, but rather returning them free from people, chattels and interests. Given that the definition of ‘premises’ in the lease was also not fixed (as it referred to them as they were from time to time), they could not be alleged to be too bare when handed back to the landlord.
Whilst the premises might not have been fit for use at the break date, the exercise of the break was not prevented as it was not conditional on the tenant fulfilling its repairing obligations under the lease or – more generally – observing and performing the covenants in the lease. The court ruled that the landlord had other remedies in respect of the tenant’s breach of repair covenant so did not need to be assisted by an ineffective break.
The case therefore highlights that the requirement for vacant possession in a break clause does not relate to the condition of the property and, although the requirement for vacant possession can be failed by a tenant leaving too much at a property, leaving too little does not necessarily prevent the exercise of a break right.
Break clauses in leases should be drafted and considered carefully and, when negotiating a break option, we would advise landlords and prospective tenants that pre-conditions concerning vacant possession and the condition of the property should be separately drafted in order to avoid any ambiguity, reducing the risk of dispute further down the line.
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