Covid-19 has changed the way we work as well as how we think about workplaces. As we go back into the office, many businesses will be reviewing the space they occupy and reconsidering how much they’re likely to need in the future. A break option in a lease can be a valuable opportunity for any occupier whose real estate needs are changing.
However, breaking a lease is rarely as simple as serving notice on the landlord and handing back the keys. Breaks are typically the subject of conditions which the tenant must satisfy for the break to be effective. Failure to do so means the lease isn’t broken, the opportunity to walk away is lost and the lease continues to run for the remainder of the term. That can have huge financial implications for the tenant.
Probably the most common break condition requires the tenant to provide vacant possession. That ought to be simple enough but in recent years it’s become increasingly problematic because the meaning of vacant possession has been redefined by several landmark court cases.
What does vacant possession mean?
At its simplest, vacant possession means that no people remain in the premises and that they are materially cleared of the tenant’s chattels. However, tenants have been caught out by failing to remove fixtures that the courts considered to be chattels. That might include, for example, partitioning, floor coverings, and the like installed during the term by the tenant. In such cases, the courts have ruled that vacant possession had not been achieved, and the lease continued.
Conversely, the case of Capitol Park Leeds Plc v. Global Radio Services Limited (2020) held that it is possible to leave a property too vacant! In the exercise of a lease break, the tenant mistakenly removed seventeen fixtures that were provided by the landlord at the start of the lease. Although the intention was to replace them, the tenant ran out of time and the landlord was handed back significantly less than the “premises”, as they had been defined in the lease. In resolving the dispute, the courts ruled that the whole of the premises were not returned and, as a result, the break was not effective.
Although there were some additional nuances to this case, it’s increasingly clear that the risks of failing to achieve strict compliance with the conditions attached to break clauses means that breaks are becoming more and more difficult to achieve. This shows how important it is to take legal and building surveying advice as early as possible. That will ensure the correct interpretation can be applied to any conditions and provide sufficient time to comply with them.
Here are a few pointers to help you avoid getting caught out by a conditional break:
1) Try to avoid conditions altogether – Before taking a lease, negotiate to eliminate or minimise the conditions attached to any break options. Look for clarity and avoid ambiguity in the drafting, remove any latitude of meaning which could be exploited by the landlord.
2) Get early advice – When you begin to consider whether or not to break a lease, take legal and building surveying advice on the practicalities of doing so, to get a complete picture of the challenges you will face in achieving a standard of compliance that allows the break to be effective.
3) Leave enough time - You may have no choice but to carry out substantial repairs and reinstatement work to satisfy the conditions attached to the break. This needs to be fully reflected in your timetable and tie in with dates the lease may specify for serving break notices.
4) Provisioning - Get early advice for setting budgets. The strict obligations for compliance mean this is not the time to cut corners. Healthy and accurate budgets will be needed, so expert advice is required.
5) Negotiate – It’s often a lower risk strategy to negotiate your way out of a conditional break rather than tackle the break conditions yourself. But you do need time on your side in case negotiations aren’t successful. Having an expert surveyor engage in early discussions with the landlord will give you the best chance of securing an uncontested, guaranteed break of the lease.
The consequences of an unsuccessful break option can be very significant. The immediate financial impact is obvious but the broader implications on business planning, investment strategy, employment profile and corporate risk, all spread wider than the single issue of being stuck with the liability for property you no longer need.