Muddying the dilapidations waters

Two new dilapidations cases have been reported, but do they give tenants, and tenants’ surveyors, greater clarity, or do they add to the complexity of deciding how to satisfy lease obligations? After an overview of each case, I’ll explain what conclusions they seem to leave us to deal with. The first case My summary of Pullman Foods Ltd v Welsh Ministers [2020] EWHC 2521 (TCC); [2020] PLSCS 182 – don’t leave a site contaminated with asbestos and expect your landlord to consider the site to be in good repair and condition. Yes, I have reduced a 60-odd page judgment to a single sentence, but that seems to have been the crux of the case. Of more use to us is that Pullman Foods also reminds tenants and their surveyors that a repairing obligation requiring the tenant to “keep the premises in good and substantial repair and condition” is actually two related but separate obligations. A breach of the “repair” obligation requires damage or deterioration from a former state. A breach of the “condition” obligation does not appear to. There is relatively little case law on condition obligations, but Pullman Foods adds to the cadre. So, in a different context, if that “condition” requirement is included within, say, a landlord’s service charge obligation, then it matters not that the dangerous cladding on the building is in good repair (ie it is not damaged and hasn’t deteriorated). The question is whether or not the dangerous cladding is in good condition. And if the landlord has a contractual obligation to put the cladding into good condition, normally the tenants have a contractual obligation to fund that service charge work. The second case In Capitol Park Leeds plc v Global Radio Services Ltd [2020] EWHC 2750 (Ch); [2020] PLSCS 193, the tenant wanted to exercise its option to break. The break clause appears to have been relatively standard, and one of the conditions the tenant needed to comply with on the break date was that it should provide vacant possession of the premises. Vacant possession should be a simple concept; in broad terms there should be no substantial physical impediment to the landlord’s immediate use or enjoyment of the premises when they are handed back. Typically, this has meant the tenant should ensure that nobody is present, that there are no third-party rights, that keys and alarm codes have been handed over, that it is clear to the landlord that access is available to them, that chattels have been removed, etc. But case law keeps getting in the way and making things more complicated. Unfortunately, Capitol Park has not made things simpler. The court didn’t really get to consider the meaning of the words “vacant possession” as the case focused on the definition of “the premises”. Perhaps this isn’t too surprising because the previous vacant possession break option case (Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch); [2016] PLSCS 222) also partly focused on the definition of “the premises”. So, clearly, the parties and their surveyors need to be giving proper attention to what is demised to the tenant (and what is not). In Capitol Park, the tenant understood that it needed to remove items in order to achieve vacant possession, and it did so. However, on the purported break date, more than just their fit-out had gone. The tenant had also removed what appears to have been a substantial amount of landlord’s fixtures. In the past, it has been cautious and sensible advice to tell a tenant, who wants to achieve a vacant possession-conditional break, to remove more (rather than less) of what is strictly necessary, so as to be sure nothing that is left behind should have been removed. Perhaps now, that safety net has been removed, or at least reduced in size. The judge in Capitol Park held that the tenant had not given the landlord back “the premises” because so many landlord’s fixtures were missing (and landlord’s fixtures formed part of “the premises”). The judge in Riverside Park held that the partitions left behind by the tenant were chattels, and of sufficient quantity to mean that the landlord couldn’t enjoy occupation of the premises sufficiently. But, in obiter comments (which do not create a precedent), he suggested that, even if the partitions had been held to be tenant’s fixtures, their presence would have prevented vacant possession being achieved, noting that the definition of the premises excluded tenant’s fixtures. The court in Capitol Park considered Riverside Park, but there was no need (unfortunately) to clarify the Riverside Park obiter comments. So, what are poor old tenants and their surveyors supposed to do now? Well, perhaps achieving vacant possession can no longer be considered to be a question of removing “at least” everything that needs to be removed. Perhaps it is now a question of hitting the Goldilocks zone – not too little, not too much, but just right. If that sounds easy, then I’m here to tell you that it normally isn’t. The key question marks First, the tenant will get no help from the landlord (obviously). Secondly, should tenants follow the obiter comments in Riverside Park? Probably – to be safe. But if the definition of the demised premises is silent on the question of tenant’s fixtures (as opposed to specifically excluding tenant’s fixtures) then what is the position? Thirdly, what did the premises look like at the start of the lease term? Quite often nobody knows. If the premises were an open-plan office then that is reasonably easy, so long as there is evidence of that fact, but let’s imagine an office which contained partitions and an old kitchen at the start of the lease term. Were these landlord’s fixtures? If the tenant has removed them, should they be put back? If exact matches can’t be found, are modern equivalents a suitable replacement? Fourthly, if the tenant has installed a fixture, might it actually be classified as a landlord’s fixture rather than a tenant’s fixture? If you want to follow Riverside Park and remove tenant’s fixtures but you also know you must follow Capitol Park and not remove landlord’s fixtures, you have a problem. Oh, and why don’t we add another complication? Consider licensed or unlicensed alterations that may or may not have to be removed to achieve vacant possession, such as an obligation either being triggered or not being triggered by a landlord’s reinstatement notice, which may or may not arrive. And, as was an issue in Riverside Park, do the “alterations” completed on site match those shown in the licence? How about a possible crumb of comfort for tenants: in Capitol Park, the tenant removed a substantial amount of landlord’s fixtures. Perhaps a judge in a different case can make a distinction in the event that not many landlord’s fixtures are removed. Capitol Park also raised some useful reminders for all surveyors: (i) If you think you have an agreement with the other side, write it down, send it to them and ask them to confirm their agreement in writing. (ii) Estoppel arguments are expensive. (iii) If you are wanting to negotiate a financial settlement and surrender in lieu of a lease break, don’t stop the site works necessary to comply with any conditions until such time as an agreement is finalised. Otherwise you risk having insufficient time left to satisfy the break conditions. My summary – good luck tenants, and good luck tenants’ surveyors. Leave to appeal Capitol Park has been granted. What about not being in occupation on the break date? Many recently drafted conditional break clauses don’t require the tenant to achieve vacant possession but “only” require the tenant “not to be in occupation”. We don’t know what that means yet, so prudent advice to date has been to assume it probably means vacant possession, even though everyone seems to expect that it is a lower hurdle than is vacant possession. Reflecting on the emphasis being given to the definition of the premises, perhaps that is a mechanism by which to differentiate between “vacant possession” and not being “in occupation”. Handing back the premises is a positive obligation, whereas not being in occupation of the premises is a negative obligation. To achieve the latter, perhaps you don’t have to worry so much about what the premises consist (or consisted) of, you just have to be not in occupation of whatever they consist of at that moment? Then again, if you are using the premises to house your chattels and your tenant’s fixtures, are you in occupation after all? Perhaps it just doesn’t matter so much if not all of the premises are there. Capitol Park hasn’t answered all of our vacant possession queries, but maybe it has helped us understand “not being in occupation” slightly better. Or maybe not, obviously… Jon Rowling is a technical partner at TFT Photo: Pexels