Delivering vacant possession

What does vacant possession really mean? In the case of NYK Logistics (UK) Limited -v- Ibrend Estates BV, the Court of Appeal considered what a tenant is required to do when it operates a break clause conditional on delivering up vacant possession. We examine the lessons to be learned from the case.

NYK Logistics were the tenant under a commercial lease. NYK served notice to break the lease and then made a start repairing and reinstating the premises to avoid a dilapidations claim after the break date.

The break date arrived, but NYK had not finished the repair works; the landlord argued that NYC had therefore stayed in possession and control of the premises after the break date.

During the week before the break date, NYC had discussed with the landlord the possibility of agreeing an extension of time to enable NYC to complete the repair works, but these negotiations were inconclusive and no formal extension was agreed.

On the break date NYC retained the keys to the premises and also the site security that it had in place.

NYC contended that the landlord had waived the breach of the obligation to deliver up vacant possession.

What did the Court decide?

The Court of Appeal found on the facts that NYC had not taken any actions that were consistent with delivering the vacant possession of the premises.

Essentially there is a two part test for establishing whether premises have been delivered with vacant possession:

1. Were the premises still actually being used by the person who was required to give vacant possession for his own purposes as at the break date?
2. Is the physical condition of the premises such that there is no substantial impediment to the use of the premises (or a substantial part of them) by the person taking the property?

Previous cases have established that physical impediments only become vacant possession issues in exceptional circumstances. This was not the situation in the NYC Logistics case.

In addition, on NYC's waiver point, the Court found that the landlord had not waived the obligation on NYC to deliver up vacant possession and had not intended to do so. Waiver is always a difficult point to prove.

Practical points

Many leases still contain a tenant's right to break its lease provided that certain pre-conditions are complied with. Historically, tenants' break rights, which were subject to conditions, were more common due to the fact that the market was such that tenants were perfectly willing to accept onerous lease terms. Even in the current climate, however, especially when the lease in question is for a short term, conditional break clauses are still to be found in commercial leases.

A conditional break clause can often make it difficult for the tenant to validly terminate the lease. The break provision in the NYC Logistics case was actually much fairer than many clauses that you will see, but nevertheless it was still one which the tenant still failed to effect.

The following points should be taken away from this case:

• Tenants must ensure that they have complied with the lease and delivered up vacant possession, and can evidence this if necessary - this is particularly the case in the current financial climate where landlords may have concerns about re-letting premises and so will be keen to look for ways to keep the tenant on the hook.
• Whether the lease expressly requires the tenant to give vacant possession on termination or not, vacant possession is nevertheless required when the lease comes to an end on the exercise of break rights. However, unless the break is conditional upon giving vacant possession, failure to give vacant possession will not invalidate the break, but may still render the tenant liable for damages for continued use and occupation of the premises.
• Waiver of an obligation under a lease is very difficult to prove and is not an argument that will be readily accepted by the Court.

Emma Wilson is a solicitor in the Michelmores Property Litigation Team. For further information on the issues raised in this article, please contact Emma at emma.wilson@michelmores.com