The consequences of failure to exercise a break clause correctly can be costly for the tenant. One of several points to be aware of is the meaning of "vacant possession", which is almost always a pre-condition.
In the case of NYK Logistics v Ibrend Estates BV, NYK was a tenant of a warehouse, owned by Ibrend. The lease contained a break clause which entitled NYK to terminate the term provided that, inter alia, NYK delivered up "vacant possession" of the property on the break date.
"The concept of 'vacant possession'... means that at the moment that 'vacant possession' is required to be given, the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it."
Rimer LJ
NYK served a valid break notice. However, it had not finished the dilapidations works by the break date. As a result, NYK's workmen remained on site finishing the repairs until some six days after the break date. Ibrend contended that NYK had failed to give "vacant possession" of the property and that therefore the lease continued, as one of the pre-conditions had not been met. At first instance, the Court held in favour of Ibrend, but NYK appealed and it fell to the Court of Appeal to decide whether NYK had given "vacant possession" or not.
Previous case law
The leading case had been Cumberland Consolidated Holdings Limited v Ireland, which proposed two possible tests for deciding whether or not "vacant possession" had been given namely:
- A vendor who leaves property of his own in the premises (subject to the rule of de minimis) cannot be said to have given "vacant possession" as he is effectively claiming a right to use the premises for his own purposes, eg, for storage.
- If there is something which amounts to a physical impediment which substantially prevents or interferes with the enjoyment of the right of possession of a substantial part of the property, then "vacant possession" will not have been given.
Ibrend's case rested on the first test, ie, that after the break date NYK were still "using the property for their own purposes", by the presence of their security guards and workmen and that therefore "vacant possession" had not been given.
However, the Court of Appeal was not convinced that the decision in Cumberland was of assistance, as the facts of the present case were very different, since the tenant had not left a substantial amount of property behind or anything which amounted to a physical impediment to the use of the premises. The argument here was whether the presence of the workmen (and indeed the security guards) meant that the tenant was either using the property as his own or impeding the landlord in the use of it. Rimer LJ therefore proffered the following analysis:
"The concept of 'vacant possession' in the present context is not, I consider, complicated. It means what it does in every domestic and commercial sale in which there is an obligation to give 'vacant possession' on completion. It means that at the moment that 'vacant possession' is required to be given, the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it. It must also be empty of chattels, although the obligation in this respect is likely only to be breached if any chattels left in the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property."
The judgment
The Court concluded that the tenant's dilapidations obligations did not need to be met in order to comply with the break clause and that they could have been dealt with subsequent to the break date. Therefore, the presence of the tenant's contractors after the break date meant that NYK was using the property for its own purposes – to avoid breaching its obligations and having to pay additional sums under the lease.
The Court held that as Ibrend had not formally agreed to extend NYK's occupation, NYK should have moved everyone out of the property by the break date. As it had not done this, "vacant possession" had not been given.
NYK had argued that Ibrend had waived NYK's breach of the terms of the break clause due to discussions between the parties, very close to the break date, as to the works still to be carried out and as to the handing over of the keys. Unfortunately, they were unsuccessful as the Court held that there was insufficient evidence that any agreement had been reached with Ibrend that would establish such a waiver.
Conclusion
Lawyers should therefore continue to advise their clients that it is critical to get "vacant possession" right. This means removing all chattels and people from the property prior to the break date. In addition, the express conditions of a break clause must be strictly complied with and any purported waiver of such conditions must be given by the landlord in writing. Anything less formal will inevitably result in prejudicing the effectiveness of the exercise of the break and the courts appear to have little sympathy for tenants who do not take such precautions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
