UK: Broken Covenants - How To Ensure A Break Is Valid

Last Updated: 27 April 2012
Article by Richard Flenley

A lease will almost always stipulate the condition in which the demised property should be yielded up. However, even if it does not contain an express yield–up provision, a term will be implied that the tenant will deliver the premises back to the landlord. Thus, the tenant should vacate (save for the performance of reinstatement works) and remove its chattels. This is all the more important when it forms the subject of an express break condition.

In Ibrend Estates BV v NYK Logistics (UK) Ltd [2011] EWCA Civ 683; [2011] 36 EG 94, the Court decided that a tenant had failed to give vacant possession in accordance with the break clause in its lease because workmen that it had employed remained in the property following the break date to finish off outstanding repairs.

The tenant's attempt to break the lease therefore failed, leaving the tenant with no option but to reassume its obligations under the lease and the inevitable cost that this involved.

Points to be considered

When ensuring that the tenant complies with its obligation to provide vacant possession it is of fundamental importance to ensure compliance with all terms of the lease that govern delivery up of the demised property. Where the tenant is attempting to break the lease, it is also paramount to ensure that the conditions attached to the break right are followed to the letter.

The yield–up clause in any lease will usually require a tenant to remove fixtures and any alterations it has made to the property and to make good any damage caused by the removal, but the reinstatement obligation may also be in a licence for alterations. There may also be further covenants in the body of the lease but outside of the yield-up clause and, as already indicated, the conditions attached to any break right must also be critically examined should it be a break situation.

Where a tenant is attempting to break the lease early, failure to be in full compliance with the break conditions will almost certainly render the attempt to break invalid unless the tenant has a kind landlord that is prepared to overlook the tenant's failure. In the current economic situation such kind landlords are in short supply.

The question of vacant possession

The term "vacant possession" stipulates a condition to yield up a property in a vacant state that can be immediately occupied. This is required of a seller of non-tenanted property and is often a condition of a break option or of the expiry of the lease. It is also a vital consideration when addressing the question of holding over of a business tenancy under the Landlord and Tenant Act 1954. It should be taken very seriously since failure to comply will be a breach of contract, potentially, amongst other consequences, preventing a sale or (as mentioned earlier) failing a condition to end a lease forcing continuance.

Getting it wrong can be very expensive indeed.

Historically, the test of vacant possession was whether what is left prevents or interferes with the use/enjoyment of the premises, subject to the de minimis rule: Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264. Substantial chattels (Scotland v Solomon [2002] EWHC 1886 (Ch), employees (Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2006] EWHC 1008 (Ch)) or waste at a property can breach vacant possession conditions. However, the level or location of the remaining items may be a consideration, for example, leaving waste outside may not be a breach: Hynes v Vaughan (1985) 50 P&CR 444.

Disputes can arise over chattels and fixtures (Elitestone Ltd v Morris [1997] 27 EG 116), so parties should clarify items to be removed. Employees should not remain in occupation (Legal & General) and ensure occupiers on lease or licence vacate in good time: Beard v Porter [1948] 1 KB 321.

The recent Ibrend Estates BV v NYK Logistics (UK) Ltd decision reiterated the potential issues concerning vacant possession conditions and clarified the tests of vacant possession. Rimer LJ summarised the position:

"at the moment "vacant possession" is required to be given, the property is empty of people and 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."

Decommissioning properties to provide vacant possession should not be overlooked. The process has practical implications, such as providing opportunity to check security and assess additional measures, read meters, drain down services and identify any remaining confidential materials.

Therefore, you ignore your obligations at your peril.

Other considerations

If, however, there is no attempted break, or there is but the landlord has waived its right to challenge the tenant's failure to comply with the condition to provide vacant possession to the landlord or there is but the break does not contain such an express or implied condition, if any works of repair or reinstatement have not been completed by the date of termination, the landlord may still have a claim in damages against the tenant.

The landlord's damages claim for breach of the repair covenant is capped by the first limb of section 18(1) of the Landlord and Tenant Act 1927, which requires that the claim for damages shall not exceed the amount by which the value of the landlord's reversion is diminished by the breaches of covenant. Since Latimer v Carney [2006] EWCA Civ 1417, the provision also applies to the breach of the covenant to decorate where the breach is also a breach of the repair covenant.

It will be for the landlord to prove that the value of its reversion has been diminished and by how much, particularly where the proposed works have not yet been undertaken.

The limitation does not, however, apply to a covenant to reinstate at the end of the term.

It is likely to be difficult for the landlord to prove that the diminution in value is due to the failure to repair or redecorate if it has no intention to carry out the works that should have been done, only to refurbish or redevelop. Furthermore, even if there is no intention on the landlord's part to refurbish or redevelop, failure to prove that it has actually expended the sums it is claiming can lead to dramatic reductions being made from the landlord's claim.

Further, if, at the termination date, the landlord plans to redevelop or refurbish the property, this will affect the claim; a claim cannot be made in respect of works that would be redundant under the second limb of section 18(1) (like, for example, where the landlord makes a claim for a replacement carpet but intends, at the date of termination, to install a raised floor over where the carpet was originally situated. In such circumstances the claim for the cost of the replacement carpet would almost certainly fail). Similarly, the landlord cannot claim for the cost of works of modernisation before re-letting: PGF II SA v Royal & Sun Alliance Insurance plc [2010] EWHC 1459 (TCC). The landlord's plans should therefore be ascertained to decide whether it is worth carrying out works before the lease ends.

It for this reason, amongst others, that we strongly recommend that there is consistent communication between landlord and tenant in the run up to the termination date (or, where appropriate, the break date) to minimise the risk of dispute.

Problematic notice

One further issue commonly arises, and that is the question of how much notice the landlord should provide the tenant with when it comes to the issue of reinstatement of alterations.

The Lease Code 2007 provides that landlords should not unreasonably require tenants to remove permitted alterations and to make good at the lease end. It further provides that landlords should notify tenants of their requirements at least six months before the termination date. However, the code will not override the contractual obligations contained in a lease or the common law position.

You would think that the landlord should be forced to give the tenant sufficiently early and detailed notice to allow it to reinstate without bringing about a situation of breach. However, this is not the case and the unreported 1993 case of Scottish Mutual Assurance Society Ltd v British Telecommunications plc confirmed this point. Here the landlord gave the tenant seven days notice; the court decided that, in the context of the relevant lease, the tenant's obligation was to start the works by the term date, not to complete them, so that it could do so after the lease expired. As usual, it will turn on the facts of the individual case and there could quite foreseeably be a situation in which the service of a schedule of dilapidations amounts to sufficient notice of the need to reinstate, as was the case in Westminster City Council v HSBC Bank plc [2003] EWHC 393 (TCC).

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