Make a clean break – Partitions render break clause ineffective

Break clauses within commercial leases can be an area of contention should ambiguity seep into the drafting or in the event conditions attaching to the break are not precisely complied with.  A break clause affords either one or both parties a mechanism to exit the lease on a set date or dates, usually years ahead of the term expiry[1].  The party wishing to exercise the break clause should bear in mind that the other side may not be as keen as it is to bring the lease to an early end.  By way of an example, the inclusion of a break clause in the lease may have been a fundamental term for a new tenant however, if a landlord considers that it may struggle to relet the premises after the break date, then it is likely to focus on any attaching conditions to ensure that these have been absolutely adhered to.  If they have not, it could prove beneficial for the landlord; costly for the tenant.

The recent case on this point, Riverside Park Limited (“the landlord”) v NHS Property Services Limited (“the tenant”) [2016], involved a 10 year lease containing a tenant option to break the lease at the end of the 5th anniversary of the term.  The break clause required that the tenant give the landlord 6 months’ prior notice of its intention to exercise the break in the prescribed form and to give up vacant possession of the premises on or before the break date.  The tenant exercised its option to break and served the notice as required.

During its occupation, the tenant had carried out various works pursuant to a licence for alterations.  This involved the installation of a large amount of partitioning, kitchen units, floor coverings, an intruder alarm and water stand pipes within a large meeting room (together known as “the Works”).  On the date the break notice was to take effect, the Works had not been removed from the premises.  Accordingly, it was argued by the Landlord that their presence rendered the break notice ineffective as the tenant failed to yield up the premises with vacant possession.

In order to ascertain the validity of the break notice, the Court posed the following three questions:

  1. Were the Works chattels or tenant fixtures and fittings?
  2. If they were chattels, does their existence in the premises at the break date mean vacant possession had not been given?
  3. If they were tenant fixtures and fittings, was the tenant obliged to remove them and does a failure to do so amount to failure to give vacant possession?

Decision

Although each element of the Works was reviewed, the Court focused mainly on the partitioning and whether its installation amounted to it becoming a “fixture” of the premises.  To determine this, the Court considered the degree and purpose of annexation.  A crucial question was whether the partitioning intended to afford a permanent and lasting improvement to the building or was it simply fitted for the use and enjoyment of the chattel (Hellawell, 1851).  The Court reflected on the view outlined in Dowding and Reynolds, Dilapidations: The Modern Law and Practice that if a partition is realistically capable of being removed and used elsewhere it would be easier to conclude that it had not ceased to become a chattel, as opposed to a structure that cannot be removed without destroying it; in such instance, the item is likely to have lost its chattel nature.  Coupling this with the evidence of the joint expert (instructed by both parties to give an opinion on key matters of the case) whose view was that the partitions were “standard demountable partitions” thus implying that they may be reused elsewhere, the Court concluded that although they were held in place by screw fixings to the raised floor, this did not amount to annexation to the structure and accordingly did not form part of the premises.  The partitions were held as chattels.

It was now for the Court to consider whether these chattels prevented the tenant from giving up vacant possession to the Landlord.  It was found that they did on the basis that the partitions substantially interfered with the landlord’s enjoyment of a substantial part of the premises.  The landlord’s enjoyment of the premises was held to include having the premises returned in a condition that was attractive to prospective tenants.  Receiving the premises with partitioning covering a large area assembled in a bespoke manner suitable only to this specific tenant, adversely impacted this enjoyment.  Accordingly vacant possession was frustrated, proving fatal to the effect of the break.

For the avoidance of doubt, the Court explored what its findings would have been had its view been that the Works were not chattels but tenant fixtures.  In this case the Court found that the break would still have failed as the definition of premises excluded tenant fixtures and fittings.  The tenant had argued that that the partitions would fall under the definition of premises as a non load bearing wall however this was not accepted as partitions and non load bearing walls were used as separate terms within the lease, implying a differentiated meaning for each.  The tenant also argued that the licence terms required that the Works only be removed if the Landlord required it.  This argument failed as the licence was no longer in effect at the break date due to material breaches of same including the tenant failing to obtain consent from the insurers of the landlord and failing to install the partitioning to the approved specification.  Accordingly, the caveat of the landlord having to request their removal had fallen away and an obligation on the tenant to reinstate the premises to its prior condition had arisen.

Key points to note

Whether an item will be viewed as a chattel or a tenant fixture or fitting will be a question of fact for each case; it should be borne in mind that this case does not state that all partitions will be henceforth defined as chattels.  What should be taken away however is the importance of strict compliance to any condition attaching to a break clause.  Agreeing any conditionality to a break clause, such as payment of the annual rent or rents, material breach of covenants or, as in the case discussed, vacant possession, will result in risk to the effectiveness of the break clause and so a tenant should be keen to avoid their inclusion.  From a landlord’s perspective however, attaching conditions to the break clause will ensure that the tenant cannot simply choose to end the lease early should rents remain outstanding, the premises not be returned in the appropriate condition etc.  The final position reflected in the lease will come down to the negotiating strengths of the each of the parties.

If vacant possession in particular is insisted on by the landlord, it is advisable to use practical measures to remove ambiguity.  The preparation of a schedule of condition at the outset of the lease is a useful aid for both parties in establishing the condition that the premises is to be returned to the landlord on the exercise of a break clause. If in doubt, stripping out all items prior to the break date should remove any scope for queries over whether vacant possession has been given up and the possibility of ensuing litigation.

Should you wish to discuss any points raised within this article or should you require any further information on this topic generally, please contact a member of the Real Estate team at Tughans who would be happy to assist you.

[1] A landlord break in Northern Ireland will be subject to the Business Tenancies Order (NI) 1996

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While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.