Pretty vacant or ugly shell?

This article by Ben Gildea,  an associate solicitor in the real estate disputes team at Irwin Mitchell, first appeared in Estates Gazette

In Capitol Park Leeds plc v Global Radio Services [2020] EWHC 2750 (Ch); [2020] PLSCS 193 the High Court held that a tenant’s failure to hand back “Premises” as demised by a lease rendered the exercise of a break option ineffective, as the tenant had failed to comply with a break condition requiring it to provide vacant possession of the premises on the break date.

The history

Global Radio held a 24-year lease with a fixed break date on 12 November 2017, subject to providing six months written notice and compliance with various break conditions. The conditions included a requirement to provide vacant possession of the premises on the break date. The premises had been defined by the lease as including “all fixtures and fittings at the Premises whenever fixed (except Tenant’s fixtures)” and “all additions and improvements made to the Premises”.

Having served its break notice, Global Radio subsequently embarked on a programme of works to ensure compliance with its covenants in the lease prior to the break date. This entailed the stripping out of substantial features of the premises including radiators, heating pipework, ceiling tiles and the smoke detection system.

Global Radio subsequently entered into negotiations with the landlord, Capitol Park Leeds, over a possible settlement of its liabilities, which had led to a pause in the works. Unfortunately for Global Radio, those discussions had not resulted in a settlement and it found itself with limited time to replace the items it had removed prior to the break date.

Capitol Park argued that, having returned the premises on 12 November 2017 minus those various items that had been stripped out, Global Radio had failed to provide vacant possession and so had not successfully exercised the break option and was therefore committed to the lease until its contractual expiry in 2025.

It was Global Radio’s case on the other hand that, although it was in breach of covenant in respect of its repairing obligations and liable to a dilapidations claim, it had nevertheless provided vacant possession and had therefore successfully exercised the break option.

Had vacant possession been provided?

The court agreed with the landlord on the basis that:

1.  By including “all fixtures and fittings at the Premises whenever fixed (except Tenant’s fixtures)” and “all additions and improvements” within the definition of “Premises”, the landlord was ensuring that a tenant exercising its break option could not do so by handing back an empty shell of a building which was “dysfunctional and unoccupiable”.

2.  Global Radio had stopped its programme of works hoping to negotiate a settlement. However, those negotiations had failed, the clock had run down and it handed back considerably less than the “Premises” as defined by the lease.

In this case, Global Radio had argued in favour of a simple concept of vacant possession meaning that a property need only be empty of people, chattels and third-party interests. The court commented that previous cases had not addressed a situation where property may have been left empty but devoid of essential fixtures and fittings. Ultimately, by handing back an empty shell of a building, the court found that Global Radio had caused a substantial impediment to the landlord’s use of the property and so had failed to provide vacant possession.

The issue of estoppel

A second issue in the case was whether Capitol Park was estopped (ie prevented) from relying on Global Radio’s failure to provide vacant possession as a result of discussions that had taken place between the parties’ surveyors during a meeting held four months prior to the break date.

Global Radio alleged that the parties had agreed during the meeting that it should finish its strip-out works, leave the premises clean and tidy and agree a cash deal in lieu of any reinstatement works. It claimed to have relied on that agreement and that it would be inequitable for Capitol Park to act inconsistently with it. The court found that there had been no such agreement: the fact that there was no report or notes of the meeting or any confirmatory e-mail was said to be telling.

Lessons for tenants

This decision highlights the fact that tenants needing to comply with a vacant possession obligation should take a cautious approach. They should fully understand exactly what is required of them in terms of handing back the property on the break date. This will likely necessitate a thorough review of the lease documents and potentially surveys and investigations to identify those items which are part of the premises. Tenants should begin their preparations as early as possible to allow sufficient time to complete any investigations and all necessary works.

This case also serves as a useful reminder that timings can prove to be critical when exercising a break option. Tenants should actively seek to avoid a situation of having insufficient time to complete all works prior to the break date. Any negotiations with the landlord over a possible settlement agreement should be undertaken at an early stage or run in tandem with a programme of works. If a settlement is agreed with the landlord, it should be clearly documented.

Global Radio has been granted permission to appeal.