Vacant Possession and Commercial Lease Break Clauses - High Court Ruling

When exercising a break clause in a commercial lease, tenants are usually required to deliver up a property with vacant possession – but what exactly does that mean? The High Court confronted that issue in a case concerning a recording studio which was handed back minus a number of the landlord's original fixtures.

The 24-year lease of the modern commercial unit contained a break clause which entitled the tenant to terminate it on a specified date about 16 years into the term. The tenant gave notice of termination to the landlord as required by the lease but, when the keys were handed back, various fixtures which had formed part of the unit's original base build had been stripped out.

The landlord launched proceedings, seeking a declaration that the break option had not been validly exercised and that the lease would therefore continue until the end of its term. It was submitted that the unit, as handed back, was not the premises defined by the lease and that it had therefore not been delivered up with vacant possession.

Granting the declaration sought, the Court noted that, under the terms of the lease, the premises comprised the existing building which was there when the lease was granted, including all of the landlord's fixtures which were then in place. That broad definition made commercial common sense in that it ensured that the tenant could not exercise the break clause by handing back an empty shell which was dysfunctional and incapable of occupation. In the end, that was precisely what the tenant had done.

Although the tenant commenced works to reinstate the property and to restore the landlord's fittings, it unilaterally suspended those works in the hope of negotiating a settlement in respect of dilapidations. Those negotiations failed and, when the clock ran down, the tenant handed back considerably less than the premises as defined in the lease. The physical condition of the property when handed back presented a substantial impediment to the landlord's use of it, or a substantial part of it. The tenant had thus failed to give vacant possession.