Beware all tenants - check the break clause contained in your lease with care

Many commercial leases contain a break clause which allows a tenant to determine a lease during the fixed term of the lease provided that they satisfy the conditions imposed by the break clause.

A tenant’s solicitor  is likely to try and negotiate a break clause which allows their client to terminate the lease by limiting the break condition to requiring the tenant only to give written notice to  terminate the tenancy at the expiry of the notice period.  A landlord’s solicitor will normally try and negotiate more onerous conditions to make it harder for the tenant to successfully exercise the break.

In the recent case of Riverside Park Limited v NHS (National Health Service) Property Services Limited [2016] EWHC 1313 (Ch), the High Court considered whether or not the tenant had successfully exercised the conditional break clause contained in their lease.

Background

The tenant entered into a ten year lease of premises in the Wirral (the premises) and at the same time entered into a licence to carry out alterations to the premises. The tenant during  the tenancy proceeded to carry out works to the premises  which included the erection of partitioning, installation of based units and wall units in the kitchen, floor coverings and window blinds, although it did not obtain certain necessary other consents to carry out the alterations as required under the terms of the licence.

It was accepted by all parties that as at the break date the tenant had not removed the alterations to the premises  and had not  re-instated the  premises to the same state and  condition as they were in when the lease commenced.

The lease contained a break clause allowing the tenant to break the lease on the fifth anniversary of the term.

The break right was conditional on the tenant:

• Giving a minimum of six months’ written notice
• The tenant was further  required to give vacant possession of the premises to the landlord on or before the break date.

It was accepted by all parties that the tenant had served the requisite written notice so the question before the court was whether or not the tenant had satisfied the further condition as to whether or not vacant possession of the premises had been given at the break date, given the failure to remove alterations and to re-instate.

The landlord argued that the tenant had failed to give vacant possession because the alterations should be regarded as  chattels which had to be removed in order for the requirement as to vacant possession to be satisfied. The tenant argued that the alterations were tenant’s fixtures and as a result now formed part of the premises, so there was no requirement for them to be removed in order to give vacant possession.

The test of whether an item is a fixture or a chattel depends on the extent and purpose of its annexation to the property that is to be judged by looking at both objectively.

The legal issues considered by the Court

1. Were the alterations chattels (in which case they did not form part of the premises) or were they tenant’s fixtures and fittings?
2. If they were chattels does their existence in the premises as at the break date mean that vacant possession has not been given?
3. If they were tenant’s fixtures and fittings does that mean that the tenant was required to remove them and if they had failed to do so does that meant that vacant possession had not been given?

The Court’s decision

• The Judge focussed on whether or not the internal partitioning was a chattel or a fixture. The appointed expert gave evidence that it comprised standard demountable partitions not fixed to the structural slabs below the raised floor and above the suspended ceiling, and was constructed “on top of the raised floor and extended to the underside of the suspended ceiling only”. The Judge decided that as the partitions were in no way fixed to the structure, they could be removed without injury to the fabric of the building and as such were chattels
• An obligation to give vacant possession means that the premises must be free of chattels if they substantially prevent or interfere with the enjoyment of the right of  possession of a substantial part of the premises. The partitioning did this as the premises prior to the lease being entered into were open plan and the partitioning had resulted in a series of small offices which were not attractive to prospective tenants
• The Judge further found that even if the alterations were tenant’s fixtures, under the terms of the lease the definition of ‘premises’ excluded tenant’s fixtures.  Thus the failure to remove them meant that vacant possession would still not have been given as a result of such items being in the premises and not forming part of them.

Conclusions to be drawn from the case

• A tenant should avoid wherever possible a condition in a break clause that they need to give vacant possession in order to exercise the break as such a condition can be hard to satisfy
• A break clause must be considered carefully when exercising the break in order to ensure that break can be successfully executed
• Consideration should be given to the instruction of an expert to give advice as to what is required in order to satisfy the condition, when vacant possession or a requirement to comply with other repairing covenants is a condition of the exercise of the break
• The tenant must build into their timetable for vacating the premises sufficient time for the requisite work to be carried out in order to ensure that vacant possession can be given;  otherwise it could be a costly mistake if the work cannot be completed before the break date and the condition is thereby not satisfied
• Consideration should be given to contacting the landlord  to see if they will agree to a surrender of the lease possibly on the payment of a premium, so as to have certainty that the lease will come to an end and not have the uncertainty of whether the break condition can be complied with.