It’s a common scenario that we are all use too – commercial leases expiring or break clauses being invoked often result in frustrated negotiations and, in the more extreme cases, costly disputes whilst the success (or failure) of a tenant to comply with a break clause are argued and counter-argued.
James Withall, Director of Building Consultancy 3SIXTY Real Estate, explores and weighs up the ramifications of recent precedent case law and how this, in practice, changes the way break clauses should be handled and invoked – including our recent success in executing an exit on behalf of a national occupier via a conditional break clause.
Break Clause
Break clauses have always been feared and revered in equal measure – depending which side of the fence you sit. For a tenant, a conditional break can give rise to excessive concern about compliance and rightly so. Dilapidations is a highly contentious field that should be handled and administered by expert surveyors and lawyers and not those who merely dabble. Break clauses, in particular, add additional ambiguity in regard to compliance and where there is ambiguity, there is no black or white interpretation.
Recent Precedent Case Law
The Riverside Park vs NHS Property Services case has seen a healthy clarification of the term “vacant possession” (often the base level requirement in any conditional break) and more critically, the often-disputed ground over fixtures or chattels.
In this case, NHS Property Services (the tenant) wanted to invoke their break clause from its lease at Riverside Park on the Wirral and it was required to meet two pre-conditions as set out within the break clause. Firstly, notice had to be provided in writing at least six months prior to the date of the break. Secondly, the premises had to be returned with “vacant possession”. This meant all chattels (personal property owned by the tenant) must be removed to provide free and uninterrupted access post expiry.
The tenant duly undertook what they believed to be the removal of all chattels in order to ensure compliance with vacant possession, those being loose furniture, trade paraphernalia and alike. The landlord disagreed and Riverside Park successfully argued that despite vacating the property, the tenant had left it in a condition that restricted the landlord’s free access and enjoyment – thus rendering the NHS in breach of its terms.
The offending items? Plasterboard partition stud walls screwed to the ceiling grid, which the judge ruled to be chattels and not fixed to the premises.
These installations made by the NHS were seen to impede the landlord’s free access, which meant the vacant possession wasn’t achieved and implementation of the break clause frustrated.
Fixtures vs chattels
The Riverside Park vs NHS Property Services case drew a benchmark for an age-old issue in dilapidations disputes relating to the degree of annexation and there has been much discussion on how this is applied to tenant’s alterations. Dilapidations disputes often centre around installations made by the tenant – in this case office partitions – and specifically who must bear the responsibility and cost of removal.
If the installation is deemed a chattel, the tenant has a responsibility for its removal at the end of a tenancy.
Ultimately, it comes down to an age-old debate on the definition of a chattel and how ‘permanently’ it is fixed to the property; clearly this leaves some room for a dilapidations dispute.
In order to implement a vacant possession condition, it is important to also consider whether the landlord is given ‘free access and enjoyment to the property’ at the end of the tenancy – or whether they have been impeded as a result of non-permanent fixtures and fittings.
Impacts of the precedent – co-terminus sub-lease arrangements
This precedent set in dilapidations disputes could have impact on any commercial property lease. 3SIXTY have recently successfully concluded a case in central Liverpool whereby a national occupier was attempting to invoke their conditional break clause. The conditions of this lease were, unsurprisingly, firstly to provide 3-months prior written notice to the landlord and, secondly, to provide vacant possession by the date of the break.
With the above case law now setting a marker in the sand, this may seem straight forward to successfully comply, however, no two dilapidation matters are similar and, in this case,, the tenant has sub-let the entire demise to a sub-tenant and all but agreed co-terminus lease and sub-lease expiries. In reality, the tenant was potentially snookered in that it was therefore all but impossible to ensure compliance with the second limb of the break clause, that to “…provide vacant possession [sic]” .
Of course, any post mortem of how this scenario had allowed to accrue is all but irrelevant since, the lease and sub-lease are engrossed and set in stone. Following identification of this, our team were able to structure a robust exit strategy by seeking to engage with the Landlords surveyor in a pro-active and collaborative manner well in advance of the break date in order to encourage them to the table for financial negotiations in lieu of compliance. By not disclosing the full “issue” of the co-terminus dates, we were still able to derive in excess of a 48% saving upon the Landlords claim despite the heightened break date compliance doubt.
Avoiding Costly Dilapidations Disputes
It is therefore clearer than ever that the right steps to take in order to avoid costly and protracted dilapidation disputes, or even more extreme failure to comply with conditional break clauses, is to seek early intervention from an expert Dilapidations Surveyor with a proven track record.
At 3SIXTY, our Dilapidations team are well versed in overseeing exit strategies in order to mitigate any financial exposure and to ensure the successful execution of a break clause. Our team have a proven track record in Mediation and acting as Expert in legal leasehold disputes.
Why not get the right advice from the off and avoid costly mistakes by choosing the wrong surveyors.
In the first instance, contact:
James Withall, Director
Jwithall@3SIXTYrealestate.co.uk
0117 247 0120