Lease Break Options and Vacant Possession

In the recent case NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683, the Court of Appeal upheld the Sheffield County Court’s decision that a tenant who fails to comply with a condition of the break clause will lose its right to effectively exercise the break option.

Background

In this particular case, the lease offered the tenant (NYK) break option that was subject to the payment of rents due and delivery of vacant possession. The tenant gave adequate notice to the landlord (Ibrend Estates) to exercise the break option. The tenant and the landlord also entered negotiations to allow the tenant to complete the decoration works after the break date, though nothing was formally agreed.

The tenant proceeded on the basis of the negotiations and had its workmen, security guard and a small quantity of its goods at the property during the week following the break date.

The ruling

The landlord applied to Sheffield County Court for a declaration that the tenant had not complied effectively with the relevant conditions and had failed to break the lease on the break date by virtue of the lack of vacant possession. The County Court ruled in favour of the landlord, but the tenant appealed to the Court of Appeal.

The leading authority for vacant possession in break option situations is the case of Cumberland Consolidated Holdings Limited v Ireland (1946), which sets out two alternative tests:

1. Does the tenant continue to use the premises for its own purposes in a non-trivial way (subject to the de minimis rule). This test goes to whether vacant possession has been provided in the event that the tenant’s property is left in the premises, in a way that is consistent with the continued use of the premises for the tenant’s own purposes

2.  Is there a “physical impediment” to a substantial part of the premises which presents a “substantial obstacle” to the landlord’s use and enjoyment of those premises. As before, this will be relevant to whether vacant possession has been provided and whether the landlord’s use of the premises was impeded as a result.

The above two tests are independent of one another, so only one of these needs to be satisfied to show that vacant possession was not provided.

Conclusion

The NYK Logistics case shows that any conditions in a break option clause must be strictly followed and satisfied in order for a tenant to successfully break the lease. It is also essential that any agreement to modify the conditions must be agreed in writing, and a formal legal document should be drawn up to deal with this, as correspondence alone is not enough.

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