A recent case warns tenants that their fitting-out works could inadvertently invalidate their attempts to exercise break clauses in their leases. This development could also have implications for motor dealers and franchisee tenants, writes Melissa Loucas, partner at Birketts LLP

In Riverside Park Ltd v NHS Property Services Ltd (2016) the High Court was asked to consider whether a tenant had given vacant possession of their premises back to the landlord, in accordance with the terms of their break clause.

Broadly speaking, giving “vacant possession” to someone means handing the premises over, free from occupiers and free from the previous occupier’s goods and belongings (or “chattels”), the idea being that the party accepting vacant possession is immediately able to enter, use and enjoy the relevant premises.

The tenant in this case had exercised its break right, comprising a condition that the premises be delivered back to the landlord with vacant possession. The tenant delivered the empty premises back to the landlord, but the landlord challenged the tenant’s assertion that the premises had been handed back with vacant possession. The High Court sided with the landlord.

The lease contained the usual provisions allowing the tenant to carry out certain works with the landlord’s consent, and that the landlord could request the tenant to remove those works at the end of the term if it would be reasonable for the landlord to so request.

A previous had tenant installed (among other things) demountable partitioning in its otherwise open-plan premises, with the landlord’s consent. The partitioning created a number of small offices, tailored to the tenant’s business requirements. As the current tenant received no notice from the landlord requesting removal of these works before the expiry of the tenant’s break notice, the tenant left the partitioning in situ.

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The landlord’s argument in court was that the partitioning should be considered a chattel which, as mentioned above, could preclude a finding of vacant possession if it would interfere with the landlord’s ability to re-let the premises.
Given the removable nature of the partitioning and the tenant’s bespoke configuration, the court agreed with the landlord and found that the partitioning should be considered chattels and that vacant possession had therefore not been given.

But what about the landlord’s failure to request the removal of the partitioning?

One of the terms of the landlord’s consent to the tenant’s works was that the tenant must obtain the building insurer’s approval. The tenant never obtained it, and so the works, including the partitioning, remained technically unauthorised. The court found that the landlord was under no contractual obligation to request the removal of unauthorised works. In fact, the lease specifically provided that unauthorised works were to be removed at the term’s end.

Franchisee tenants of motor dealerships frequently have to carry out expensive works to meet manufacturer requirements. Checking the lease obligations and seeking legal input before exercising break rights could save them from unfair decisions such as this, reducing the risk of faulty breaks.