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The function of a break clause is to allow either the landlord or tenant, or both, to terminate the lease early. The break clause will often stipulate conditions for the operation of the break and such conditions must be strictly complied with. It is not uncommon for a break clause to include a condition that the tenant must give vacant possession and this particular condition was examined by the High Court in the recent case Riverside Park Ltd v NHS Property Services Ltd.
On the facts of this case, the landlord granted a lease of premises to the tenant. The break clause under the lease included the condition that the tenant must give vacant possession by a specified date (break date). The landlord and tenant simultaneously entered into a licence for alterations permitting the tenant to carry out minor fit out works including the installation of partitions, kitchen units, blinds and an intruder alarm (the Works). The tenant subsequently exercised its break right however the Works had not been removed from the premises at the break date.
The landlord argued that the existence of the Works meant that the tenant had failed to give vacant possession and its break right was therefore ineffective.
Central to this case is the distinction between chattels and fixtures in the context of leasehold property. Chattels are considered to be items i.e. furniture which a tenant is typically obliged to remove from the property at the end of the term of the lease. Tenant's fixtures, in contrast, comprise chattels attached to the land by the tenant (or a predecessor) which can be removed without causing substantial damage to the land and retain their utility despite such removal.
The court had to consider:
1. Were the Works chattels or fixtures?
The Court held that the Works were chattels and the examination of the partitions in this case was key to its outcome. The Court took into account the expert’s conclusion that these were standard demountable partitions not fixed to the structure of the premises (they were held in place by screw fixings affixed to the raised floor and suspended ceiling).
The Court applied the following test - could the partitions be removed without injury to themselves or the fabric of the building? The Court held (in light of the expert’s findings) that it would be difficult to argue that the partitions could not be removed without injury to themselves or the fabric of the building.
The Court considered that the object and purpose of the annexation was likely to be the decisive factor in determining whether the Works were chattels or fixtures. The configuration of the partitioning resulted in a series of small offices, which was to benefit the tenant rather than afford a lasting improvement to the premises. Interestingly, the installation of electrical wiring which ran within the partitions did not prevent them from being chattels because they remained demountable without damage to themselves or the fabric of the building.
The status of whether or not the other Works were chattels was irrelevant to the crux of this case, nevertheless the Court made some interesting remarks on the status of other Works. These were notably:
It would be difficult for a tenant to argue that removal of window blinds and carpets, even if bespoke, could not be achieved without injury to themselves or the fabric of the building or were installed for the purposes of affording a lasting improvement to the Premises.
The kitchen base units were free-standing and easily removable and the wall units were fixed only by screws to the perimeter wall. The degree of annexation was negligible. The fact that the units were served by a water supply did not prevent it being a chattel as the Court considered the water supply could be capped without injury to the premises.
The alarm was a second alarm installed by the tenant. The court considered this to be chattel as it was difficult to conclude this afforded a lasting improvement to the building. This was merely for the tenant’s convenience.
2. If the Works were chattels, did their existence at the break date preclude the tenant from giving vacant possession?
On the basis that the Works were chattels, the Court then applied the test to establish whether the tenant had given vacant possession – did the partitions form an impediment which substantially prevented or interfered with the landlord’s enjoyment of the right of possession? On the facts, the partitions substantially interfered with the landlord’s enjoyment of the right of possession and the tenant failed to give vacant possession at the break date.
3. If they were tenant's fixtures, was the tenant obliged to remove them to give vacant possession?
The tenant further argued that it had no obligation to remove the Works because they had been incorporated into the definition of the premises. The Court rejected this argument and determined that the fixtures and specifically the term “partitioning” were excluded from the definition of the premises under the lease.
The licence for alterations was also significant in this case. The terms of the licence for alterations required the tenant to reinstate the premises if the licence ceased to have effect.
The Court held that the following circumstances constituted a material breach of the tenant’s covenants under the licence:- a) the tenant had not obtained approval from insurers; b) the tenant had not given notice to the landlord of the completion and commencement of the Works; c) the tenant failed to obtain the landlord’s approval of the contractors for the Works; and d) the tenant failed to comply with the specification for the installation of the partitioning.
The tenant’s material breach meant that the licence ceased to have effect and thus the tenant was obliged to remove the Works.
This case provides insight for both the landlord and tenant into compliance with the tenant’s condition to give vacant possession by its break date. The tenant’s non-compliance in this case meant that it was liable to continue paying rent on the lease until the end of the lease term. It is therefore vital that the tenant carefully considers this requirement when negotiating the lease and also in advance of exercising its break right.
The Court furthermore stressed throughout the case that each case will turn on its own facts.