Court of Appeal overturns High Court decision regarding break vacant possession pre-condition

In the case of Capitol Park Leeds Plc and Capitol Park Barnsley Limited -v- Global Radio Services Limited [2021] EWCA Civ 995, the Court of Appeal overturned the decision of the lower High Court ruling to confirm that a vacant possession pre-condition is confined to the Nugee J trilogy of returning the premises free of people, chattels and interests.

The tenant, Global, had removed various landlord fixtures (including ceiling grids, ceiling tiles, fan coil units, ventilation duct work, radiators and other fixtures) as part of its dilapidations works ahead of the break date. Instead of reinstating the fixtures, the tenant sought to agree a financial settlement for the remaining works including the reinstatement of the landlord’s fixtures.

The break option in the lease contained a pre-condition requiring the tenant to “[give] vacant possession of the Premises to the Landlord [on the break date]” (clause 10.1.4). The Premises defined in the lease included “all fixtures and fittings at the Premises whenever fixed”.

The landlord argued that as the tenant had removed various landlord fixtures it had not given back the “Premises” as defined. The landlord said that giving back the Premises as defined was one of the requirements of clause 10.1.4.

The tenant relied on the trilogy which Nugee J said was required to give vacant possession i.e. that the premises must be empty of people, chattels and interests (Goldman Sachs International v Procession House Trustee Limited and Another [2018] EWHC 1523) and that vacant possession is not a complicated concept.

The High Court trial Judge found that because the tenant had removed landlord’s fixtures the physical condition of the premises was such that there was a substantial impediment to the landlord’s use of the premises or a substantial part of it, within the meaning of the second test in Legal & General Assurance Society Limited v Expeditors International UK Limited [2007] EWCA Civ 7.

On Appeal, the tenant argued that it was no part of the landlord’s case that there was a substantial impediment and that the second test in Legal & General was satisfied. The landlord did not seek to support the High Court Judge’s finding in this regard.

The Court of Appeal acknowledged that the issue is a matter of construction: did Global’s removal of various fixtures/elements of the building mean that it had not given “vacant possession of the Premises” within the meaning of clause 10.1.4 of the lease?

The Court of Appeal agreed with the tenant that “vacant possession” conventionally involves a “trilogy of people, chattels, and interests” and is not concerned with the physical condition of the premises.

Newey LJ noted that there was a “telling contrast” between the yield up clause in clause 3.20.1 of the lease which required that the Premises must be yielded up “in a state of repair condition and decoration which is consistent with the proper performance of the Tenant’s covenants” and clause 10.1.4 which was not concerned with such matters. Clause 10.3 also preserved a right for the landlord to pursue the tenant for damages for any breaches of the lease (such as breach of the repairing obligation).

Newey LJ also found that the landlord’s argument runs counter to business common sense; on the landlord’s argument, a tenant could exercise the break clause successfully notwithstanding that the premises fell into a dreadful state of repair and became unlettable provided all fixtures are returned and yet if more than a minimal number of ceiling tiles were missing, the tenant’s break would fail.

The Court of Appeal also agreed that the premises should be construed “as they are from time to time” – consistent with the definition of the “Premises” which includes “all fixtures and fittings at the Premises whenever fixed”.

Importantly, the Court noted that the fact that break pre-conditions must be complied with strictly, does not mean the condition must be construed strictly or adversely against the tenant.

The decision will no doubt relieve tenants seeking to comply with vacant possession break pre-conditions and provides much needed clarity on the scope of a vacant possession pre-condition.

CMS and Counsel John Male QC of Landmark Chambers successfully defended Global.