Damage to premises did not invalidate break clause in lease

The Court of Appeal has ruled that a commercial tenant had correctly exercised a break clause in its lease despite having left the premises “dysfunctional and unoccupiable”.

The break clause provided that the tenant could terminate the lease if it gave "vacant possession of the Premises to the Landlord" on the relevant break date. The lease defined the "Premises" to include "all fixtures and fittings at the Premises whenever fixed".

At the point when the tenant exercised the break clause, it had stripped out a range of items from the premises, including ceiling grids and tiles, fire barriers, floor finishes, window sills, fan coil units, ventilation duct work, lighting, radiators and pipework.

The judge found that the tenant had not complied with break clause because it had not given vacant possession. He granted a declaration that the lease had not terminated on the break date.

He found that by including the words "all fixtures and fittings at the Premises whenever fixed," 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.

The Court of Appeal overturned that decision.

It held that the obligation to give vacant possession referred to giving back the property free of people, chattels and interests, not to its physical condition.

It was not uncommon for a break clause to be expressed to be conditional on the tenant having observed and performed covenants in a lease. In this case, however, the parties had not provided for any such requirement.

Elsewhere, the lease made provision in relation to repair and condition, which supported the tenant's case that the break clause was not concerned with such matters.

The landlord's interpretation would have implications which the parties were unlikely to have intended and which would run counter to business common sense. For example, if part of the premises were to be destroyed by fire (an insured risk), it would be incumbent on the landlord to make good the loss and the tenant's repairing covenant would not apply, yet on the landlord's case, the tenant could not give back the premises in their entirety and so would be unable to bring the lease to an end.

The tenant could exercise the break clause notwithstanding the fact that the building had been allowed to fall into a dreadful state of disrepair and become unlettable but could not do so if more than a minimal number of ceiling tiles were missing.

It was true that the tenant had left the building in a dire state, but that did not prevent valid exercise of the break clause.

The landlord's remedy was to seek compensation for whatever loss it might have suffered.

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