Commercial Lease Transactions
Break clauses – vacant possession condition
As a business leasing commercial premises, you may find that before the end of your lease term you no longer require the premises and that you wish to vacate. You may be upsizing to new premises to accommodate the growth of your business or downsizing due to financial reasons. In either case, unless your lease contains a break clause you will continue to be contractually bound to pay the rent and comply with the other lease terms.
Break clauses allow either a tenant or a landlord to terminate a lease before the end of the contractual term. This right is called a ‘break right’ and can arise on one or more dates or on a rolling basis, depending on what you have agreed at the outset and recorded in the lease.
Such rights are usually seen as a benefit to a tenant, however they are often subject to conditions which must be strictly performed in order for the break right to be exercised effectively. There is no room for error.
One of the most common and most disputed conditions is to give vacant possession. This continues to be the subject of much discussion in the courts and presents a number of considerations:
Meaning of vacant possession
Where vacant possession is required the premises must be cleared of people and empty of all other physical items, known as ‘chattels’. Your landlord must be able to enjoy immediate exclusive possession, occupation and control of the premises by midnight on the break date.
Removal of chattels
Strictly all chattels must be removed; this includes large items such as office furniture down to small items such as office stationary and, in theory, if any item is left at the premises this will be sufficient for the landlord to argue that the break right is not effective.
However, in a recent case the Court of Appeal decided that this condition would only be breached if any of the chattels left at the premises would substantially prevented or interfered with the enjoyment and right of possession of a substantial part of the premises.
It will depend on the facts of each case as to whether there was a substantial interference and subsequently a breach of this condition.
If you need to temporarily leave chattels at the premises after the break date, your landlord may agree to waive the vacant possession condition. However be careful to record any such agreement in writing as this could be sufficient to render a break right ineffective.
Lease Code 2007
It is a breach of the Lease Code 2007 to include a condition to give vacant possession on a break clause. However, whilst it is not compulsory for landlords to comply with the lease code it can be used as point of negotiation for tenants when the lease is being negotiated.
Some institutional landlords have signed up to confirm their cooperation with the code and so you should check this before entering into your lease.
Effect on a subtenant
The general principle is that where a head tenant serves a break notice to terminate its lease, the freehold landlord is entitled to possession against an undertenant. This means that any underlease will also come to an end.
However if the underlease is protected under the Landlord and Tenant Act 1954, then the underlease will still end but the undertenant will have the statutory right to apply for a new lease direct from the freehold landlord.
It is not however possible for a landlord and a tenant to agree that where a headlease is terminated the underlease will continue. If this is what the parties want then they would need to agree a surrender of the head lease instead.
Protection under the Landlord and Tenant Act 1954
If your lease is not protected by the security of tenure provisions in the 1954 Act then it will, assuming all conditions have been complied with, come to end on the break date.
If your lease is protected, then your lease can only be terminated in accordance with the 1954 Act but for this purpose the break notice you serve in order to exercise your break right will amount to the required notice to quit under the 1954 Act. This means that you cannot subsequently serve a notice on your landlord requiring a new tenancy.
It is very important when exercising a break right that you are aware of the extent of your obligations in complying with any conditions. If the exercise of your break right is disputed it could mean that you have to continue with your obligations under the lease such as paying for rent and maintenance. In addition, if you have already committed yourself by signing a lease on alternative premises you could have the burden and expense of a secondary lease obligation to comply with as well.