The Court of Appeal has handed down an important judgment on the operation of conditional break clauses and has found in favour of the tenant.
Global Radio, the tenant, wished to terminate their lease with Capitol, the landlord, by exercising the break clause. It was a stipulation of the break clause that the Tenant "gives vacant possession of the Premises to the Landlord on the relevant Tenant's Break Date". By the break date, Global had stripped out from the property a significant range of items including ceiling tiles, fire barriers and office lighting.
"Premises" were defined in the lease as "including all fixtures and fittings at the Premises whenever fixed except those which are generally regarded as tenant's or trade fixtures and fittings" as well as "all additions and improvements made to the Premises".
Capitol argued that Global did not give vacant possession of the Premises on the break date and so failed to comply with the break clause.
In 2020, the High Court found that the lease continued because Global failed to give vacant possession of the Premises because they "gave back considerably less than the Premises as defined in the lease". The second test cited in Cumberland and Legal & General was said to be satisfied, namely that the physical condition of the property was such that there was a substantial impediment to the Landlord's use of the Property, or a substantial part of it.
The Court of Appeal overruled the High Court by ruling that the break clause was effected and the lease terminated on the break date because:
- To give vacant possession the Premises should be free of a trilogy of people, chattels and interest. The parties to the Lease did not choose to provide for any requirement in the break clause for the tenant to observe and perform covenants in the lease. Whilst the yield up clause did require the Premises to be yielded up with vacant possession "in a state of repair condition and decoration which is consistent with the proper performance of the Tenant's covenants", the break clause made no mention or repair and condition, lending support to Global's case that the break clause was not concerned with such matters.
- Capitol's interpretation of the break clause would have implications which the parties are unlikely to have intended and which would run counter to business common sense; eg if an intruder caused damage to the Premises the day before the break date, the Lease would still terminate whatever the extent of the damage unless it happened to involve the loss of a fixture.
- Capitol's construction of the vacant possession requirement of the break clause would render the lease internally inconsistent. Just as missing fixtures would prevent a tenant from giving vacant possession of the Premises under the break clause, so they would mean the tenant was not yielding up the Premises under the yield up clause. The yield up clause spoke merely of the Premises being in a state of repair and condition and decoration which is consistent with the proper performance of the Tenant's covenants, the tenant would breach this yielding up clause in whatever way a deficiency in the Premises had come about, even by Insured Risks. This would make no sense when the Lease expressly excluded damage or destruction by Insured Risks from the tenant's repairing covenant and to the contrary obliged the landlord to make good such loss or damage.
- Global's interpretation of the break clause does not leave the landlord without a remedy for deficiencies in the building. The break clause explicitly stated that termination was to be without prejudice to any right of action in respect of any previous breach of covenant or condition. It would this that would be open to the landlord to recover compensation from the tenant for, for instance, failure to repair.
- Premises should be understood to refer to "the Premises as they are from time to time" as this is consistent with the fact that the definition of Premises extends to fixtures and fittings fixed after the commencement of the Lease which at the relevant time are at the Premises. What the Premises comprise is not therefore finally settled until the point at which the Lease is concluded. This contention derives support from Ponsford v H.M.S Aerosols Ltd.
- Just because conditions prescribed in a break clause must be strictly complied with does not mean that the clause must be construed strictly or, in particular, adversely to the tenant.