Landlords and tenants alike will be aware of the caution which should be exercised in agreeing and negotiating break clauses in leases. It has become clear over the years that any conditionality attached to the exercise of a break right should be avoided if at all possible. For example, a condition requiring "compliance" or "substantial compliance" with lease covenants as a pre-condition to exercising a break right might at first sight look fairly innocuous but case law has established that these pre-conditions can be construed very strictly against a tenant and can mean that a tenant is denied its ability to exercise the break right under the lease.

It is quite common for pre-conditions referring to payment of rents and returning the property to the landlord with "vacant possession" to be agreed as part and parcel of lease terms. Payment of rent and other sums due under the lease should be fairly obvious (and merits an article in its own right) but what is meant by vacant possession? This year the Court of Appeal held in NYK Logistics (UK) Limited v. Ibrend Estates BV that there are three main obstacles to the giving of vacant possession. These are "legal impediments", "people" and "items".

A legal impediment might include a legal obstacle to giving vacant possession such as a third party lease or tenancy, a statutory restriction on use (for example a Housing Act Notice) or a dedication of part of the land to highway. People remaining at the property would seem obvious but tenants can often get caught out by sub-tenants with rights to "hold over" under the Landlord and Tenant Act 1954 or where a tenant remains at the property after the end of the term to carry out repairs. Items left at the property is also fairly self-explanatory but a tenant can be in breach for leaving a small number of items in the property, in one case, beer was left in a cellar and this was held to preclude vacant possession.

In the Ibrend case NYK Logistics was a warehouse tenant of Ibrend Estates. The lease contained a break clause which was exercised by giving the required period of notice. The clause stated that the lease would end on the break date provided that the rent had been paid "and vacant possession had been given".

NYK moved out of the property approximately 5 weeks before the last day of the term and substantially complied with its repairing and redecorating obligations, but minor items were outstanding that could not be completed by the break date. NYK preferred to complete the repairs itself. There was no incoming tenant and the landlord's agent had not arranged for any security on site so NYK arranged for security guards because of concerns about vandalism. It proposed to return the keys to the landlord on the break date and to pay no more rent but to pay for and keep security on site for a further week until the works were completed. The landlord's agents did not respond. At the crucial moment, midnight on the break date, the premises were empty with the exception of a few minor items and security personnel. A few days later the agent contacted NYK and agreed to make arrangements to collect the keys the next day. Unfortunately when he arrived he was refused entry by the security guard because he was unable to prove his identity. Solicitors were instructed and the whole issue of whether vacant possession had been given was looked into.

The court held that to give vacant possession the property must be empty of people, it must also be empty of chattels and that the Landlord should be able to assume and enjoy immediate and exclusive possession, occupation and control of it. The obligation in this respect is likely only to be breached if any abandoned chattels substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property.

Tenants should seek advice before implementing a break right and landlords should seek advice when a tenant purports to exercise a break right. If there is a requirement for vacant possession but if repairs are required surveyors should be consulted. It may be sensible to enter into an express agreement with the landlord as to what is required in terms of "returning the property". If a settlement is required then this will need to be agreed early in case negotiations break down at the eleventh hour. If additional time to remain at the property is required beyond the break date this should be expressly agreed so as not to affect the requirement to give vacant possession. As always, the terms of the wording of the lease should be checked carefully; what is the landlord expecting to have returned to it? For example, might the landlord be entitled to expect that tenant's fixtures or alterations should be removed?

The interpretation of these provisions is based on case law and is always open to change and uncertainty. It is vitally important to seek professional advice and to plan carefully.

If you require any further advice or assistance please contact Jane Winfield or a member of the Property team at Wortley Byers on 01277 268314 or jwinfield@wortleybyers.co.uk.

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