Q&A: Have I given vacant possession?

Lauren Fraser and Edward Francis address the impact of tenant’s fixtures on break options Question I was a tenant of retail premises and my lease contained a tenant’s break option conditional on giving vacant possession on the break date. The premises were fitted out for use as a bookmaker with the installation of glazed partitions and counters under a licence for alterations. The licence was entered into at the same time as the lease and obliged me to remove the installations and reinstate the premises at the end of the term. On the break date, I did not remove the installations but tendered the keys to the premises, which were otherwise cleared of all items. The landlord refused to accept the keys, contending that the break option had not been effectively exercised because I had failed to give vacant possession. Is the landlord correct? Answer It depends whether the installations were fixtures and so became part of the premises that you were required to yield up on the break date. If so, in principle you should not be in breach of the requirement to give vacant possession, on which the exercise of the option was conditional. In the absence of any further requirement to comply with your other obligations as a condition of exercising the break option, it should not make a difference that you failed to reinstate the premises. However, there has been a recent case that has cast doubt on this analysis. Where the exercise of a break option is subject to the satisfaction of certain conditions, the break will not take effect unless they are strictly complied with. One common condition is that the tenant must yield up vacant possession on the break date. This gives rise to the question of whether, in order to satisfy that condition, a tenant is required to remove items that it has affixed to the premises for the purposes of its trade (so-called tenant’s fixtures). Two distinct tests for vacant possession were set down in Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2006] EWHC 1008; [2007] PLSCS 12. The first focused on whether any continuing use was being made of the premises by the former tenant, the second on whether the physical condition of the premises was such as to amount to any substantial impediment to the landlord’s use of the same. In considering for these purposes what were “the premises” of which vacant possession was required to be given, the judge said (at paragraph 32): “…the premises will include anything which in law has become part of the premises by annexation. A fixture installed by the tenant for the purposes of his trade becomes part of the premises as soon as it is installed, although the tenant retains a right to sever the fixture on termination of the tenancy… If something has become part of the premises by annexation then it is part of a thing of which vacant possession has to be given. Its presence does not amount to an impediment to vacant possession itself.” Following that reasoning, if the partitioning and counters in your case were annexed to the premises as tenant’s fixtures, they became part of the premises of which vacant possession was to be given. Therefore, you should not be in breach of a condition for vacant possession simply because you have not severed and removed such items. Separate contractual obligation Does it make a difference that you were under a separate contractual obligation to remove such items? In Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch); [2016] PLSCS 222, this question arose in relation to demountable partitioning which had been installed by the tenant in the premises and which it left in situ on the date when the lease would otherwise have terminated on the exercise of a break option conditional on the tenant giving vacant possession. The judge held that, by failing to remove the partitioning, the tenant had failed to satisfy the condition for vacant possession. This was primarily because he considered that the partitioning was not a fixture but only a chattel: it was not affixed to the structure of the premises, so it could be removed without substantial damage to the premises or the partitioning itself and it had been installed not for the lasting improvement of the premises but only for the temporary benefit of the tenant. The judge held that the partitioning substantially prevented or interfered with the landlord’s right to possession. He went on to consider the position if the partitioning was a fixture forming part of the premises. He expressed the view that, as the partitioning had ceased to be a permitted addition to the premises (the tenant had failed to install the partitioning in accordance with the terms of the licence for alterations), the tenant was required to sever and remove it as part of its reinstatement obligation under the licence, and if it failed to do so it was in breach of the requirement to give vacant possession. Since the judge’s view on this question was not essential to his decision it will not be binding on other courts. And it is one which may be questioned. It is clear that if it had been a condition of the exercise of the break clause in Riverside Park that the tenant had complied with its reinstatement obligations under the lease or licence, a failure to sever and remove the partitioning would have constituted a breach of that obligation which prevented the break taking effect. It is surprising that such a failure could separately amount to a breach of the obligation to give vacant possession so as to prevent a break taking effect which is conditional only on this. The strict logic of the analysis set out in Expeditors suggests otherwise. Be that as it may, the lesson from Riverside Park is clear: a tenant exercising a break option conditional on the giving of vacant possession on the break date acts at its peril if it leaves in situ tenant’s fixtures which it is, or may arguably, be under an obligation to remove. Lauren Fraser is a senior associate in the property litigation team at Charles Russell Speechlys LLP and Edward Francis is a barrister at Enterprise Chambers