Negotiating break clauses – should they be conditional?

The facts

The tenant had a lease of open plan premises, which included a right to break on giving written notice to the landlord. The break clause was conditional on giving vacant possession on the break date. The definition of premises in the lease included all additions and improvements, fixtures and fittings except tenant’s or trade fixtures and fittings. Immediately after the lease was granted the landlord also granted a Licence for Alterations so that the tenant could carry out a bespoke fit-out of the premises. The Licence for Alterations included provision that, if its requirements were not met then the Licence would “cease to have effect”. The Licence obliged the tenant to reinstate the premises if required at or before the end of the term “or as soon as the licence granted shall cease to have effect.”

The tenant gave notice to exercise the break clause. It did so in time and served the notice properly. It did not remove the works provided for in the Licence. Did leaving those works in place at the break date frustrate the break so that the tenant had to pay a further five years’ rent?

The arguments

When the landlord claimed that the break clause had not been properly operated, the tenant argued that the works were tenant’s fixtures which had been incorporated into the premises; as such there would be a right, but crucially no obligation on the part of the tenant, to remove them at the end of the lease. Alternatively, the works amounted to “mere” chattels and, as a matter of fact, vacant possession had been given at the break date because the landlord’s ability to use and re-let the premises was not substantially affected by their presence.

The Court had to decide: whether the works were properly chattels; if they were chattels, whether their presence was enough to mean that vacant possession had not been given up, so frustrating the break; and whether, if they were fixtures, the tenant was obliged to remove them in order to give vacant possession and operate the break.

The decision

The Court held that:

1. The partitions and other works amounted to chattels (in which case they did not form part of the premises). They considered the purpose for which they had been brought onto the premises, which was to make the premises particularly suitable for the tenant; it was not for the benefit of the landlord and a series of small offices were unlikely to be what a prospective tenant would seek out in the present market.
2. By leaving the works in place, the tenant had not given vacant possession on the break date. The presence of the partitions was a substantial impediment to the landlord exercising the rights that went with vacant possession. The break was therefore ineffective.
3. The wording of the lease in general and the definition of “Premises” in particular prevented the conclusion that the partitioning had become part of the Premises. Even if the partitions had been fixtures which had become part of the Premises then the fact that the works had not been carried out in accordance with the terms of the Licence for Alterations meant that the Licence had “ceased to have effect”. The Licence itself provided that the alterations had to be reinstated if that were the case.

Comment

The distinction between chattels and fixtures is not always cut and dry and may be a question of interpreting not just the items in question themselves, but also their relationship to the building. The drafting of the lease and any relevant licence for alterations may also be relevant, as may be the parties’ intentions at the outset and market conditions at the break date. Where possible, if there is any doubt, tenants should obtain clarification from their landlords of what the landlord regards as necessary to comply with break conditions and set this out explicitly in the lease. Wily landlords will not always co-operate. In that event, tenants will need to make a careful and balanced decision as to how much expense to incur in reinstatement in order to avoid ongoing liability. The (voluntary) Lease Code 2007 provides that break clauses should not be conditional at all, the theory being that the parties can always litigate about their losses after the event. However, in our experience, it is still common to see conditional break clauses and tenants must therefore take care to ensure such clauses are properly implemented to avoid any ongoing liability. It will be interesting to see whether the recent trend for short term leases with no break rights will continue to flourish, perhaps as a rational response to the present uncertainties in the property and other markets.