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If it ain’t broke

12th October 2016

The interplay between tenants’ rent obligations and their ability to break the term of their leases has for a number of years been a topic which has been of considerable interest to practitioners advising both either landlords or tenants. Two cases in particular will have been high on the radar in advising clients both before and after the exercise of a break clause.

By way of reminder, in PCE Investors v. Cancer Research UK [2012] EWHC 884 (Ch) Peter Smith J. held that in order validly to exercise a break clause falling between rent payment dates A and B, a tenant was required to have paid all the rent lawfully due on date A and was not entitled to apportion the relevant gale of rent by paying only for the period from date A to the break date.  In that case Peter Smith J. suggested that instead of paying the reduced sum, the tenant should have paid the full gale on date A and sought to reclaim any excess later on.

That suggested approach was the focus of further litigation when, in Marks & Spencer Plc v. BNP Paribas Securities Services Trust Co (Jersey) Ltd [2013] EWHC 1279 (Ch) Morgan J. held, in a case where the tenant had paid the full gale on date A in order validly to break the lease, that a term was to be implied providing that the proportion of the rent referable to the period from the break date to date B be repaid to the tenant. The High Court was, however, reversed by the Court of Appeal ([2014] EWCA Civ 603) and the Court of Appeal was upheld by the Supreme Court ([2015] UKSC 72).

Hot on their heels comes a further interesting decision in respect of whether a tenant has or has not validly broken a lease: Riverside Park Limited v. NHS Property Services Limited [2016] EWHC 1313 (Ch).  In this case, the particular focus of attention was not on rent obligations but rather on the requirement to give vacant possession. His Honour Judge Saffman, sitting as a Judge of the High Court in the Leeds District Registry gave judgment on 27th July 2016.  The decision is particularly useful in highlighting how sharply fact-dependent compliance with provisions for delivery up with vacant possession can be; and how difficult it may be to advise any party to a lease either (1) what will need to be done in order validly to effect the break or (2) in probably more febrile circumstances – and when it may be too late – whether what has been done was enough.

NHS Property Services Limited (NHS) were the assignees of the unexpired residue of a 10-year term which had been granted to Wirral Primary Care Trust (PCT) by Riverside Park Limited (RPL) in respect of one open-plan floor of a building. The term was due to expire by effluxion of time on 24th September 2018 but contained a clause permitting the tenant to break the term on 24th September 2013 on 6 months’ notice and, importantly, providing that the notice would only be effective to determine the term if vacant possession was given on or before 24th September 2013. PCT had served a break notice prior to its assignment of the term to NHS. There was no issue about the notice itself. The crucial question was whether NHS had given vacant possession.

The question arose because, although NHS had moved out of the premises (in the lay sense) by 24th September 2013 certain things, which had not been in situ at the time the lease had been granted, were left behind by NHS.  These items (referred to in the judgment as ‘the Works’) ranged from the trivial (a pen holder and a clock) to the more substantial (flooring, kitchen units and – as proved particularly contentious – partitioning).  All of the Works had been brought on to the demised premises by PCT during the period they held the term as original tenants.  In addition, certain key fobs issued by RPL to PCT were not given up on 24th September 2013.  RPL sought declaratory relief to the effect that the lease had not been determined and that NHS therefore continued to be liable in respect of tenant obligations (including in particular the obligation to pay rent) until the contractual expiry date in September 2018.

The judge held, on the facts, that vacant possession had not been given and that NHS’s liability under the lease therefore continued.

The first issue was whether what had been left at the premises constituted chattels or fixtures.  The judge held that everything in issue (apart from one folding partition) was a chattel.  He considered that for the last 150 years or so the law had moved on from its earlier tendency to treat anything attached or annexed to land as itself constituting part of the land and that and that the modern approach (exemplified in Hellawell v. Eastwood (1851) 6 Ex 295 and Berkley v. Poulett (1976) 241 EG 911) was to consider (1) the degree to which something had been annexed and (2) the purpose for which it had been annexed (i.e. whether for the purpose of improving the land or for the purpose of enjoying the thing annexed).

On the first of those two points the judge was assisted by the single joint expert’s evidence that everything left at the premises was capable of relatively easy removal and, in particular, by the fact that the partitioning (which was described as ‘standard demountable partitioning’ and formed of metal stud partitions containing electrical wiring underneath painted plasterboard) extended only from the raised floor to the suspended ceiling and was held in place by screw fixings. On the second point the judge considered that the objective purpose of its installation was not to improve the premises: in particular because the partitioning installed by PCT had turned the open-plan demise into a unique series of small units which was, in RPL’s view, unlikely to be attractive to any potential tenant who might be minded to take the premises thereafter.

Having concluded that NHS had left its chattels at the premises, the second issue was whether they constituted an impediment which substantially interfered with RPL’s right to possession of a substantial part of the property (applying Cumberland Consolidated Holdings v. Ireland [1946] KB 264 or, put another way, deprived RPL of physical enjoyment of the premises (applying Legal & General Assurance Society Limited v. Expeditors International (UK) Ltd [2006] EWHC 1008 Ch). The judge’s view was that they did, because RPL’s enjoyment of the premises extended to it being in a lettable condition which (so far as RPL was concerned) it was not.

Consequently, NHS was lumbered with another 5 year’s rent liability, no doubt having made alternative arrangements for such of the occupants of the premises who required to be moved elsewhere. The only silver lining being that they would have a good idea what would have to be done when yielding up the property in September 2018.

The decision could very easily have been different. RPL’s licence giving permission to PCT to install the partitioning required it to be "fixed to the structural slabs below the raised floor and above the suspended ceiling". As indicated above, this was not done: the partitioning (other than one foldable element) were only fixed to the raised floor and the suspended ceiling. Had the partitioning been installed in accordance with the licence NHS’s argument that it had ceased to be a chattel and had become a fixture would have been all the stronger. An advisor venturing to give an opinion (prior to September 24th 2013) on the papers only, without the benefit of an expert’s inspection, would have been considerably handicapped. It would have been very easy to assume that the partitioning had been installed in accordance with the licence. This case is a salutary reminder not to make such an assumption. Similarly, the "substantial interference" point seems largely to have depended on the lessor’s view as to how marketable the premises were in their partitioned state. That part of the decision could certainly not have been predicted on the papers and, moreover, would not have been obvious from any inspection which had been carried out but would have required further market appraisal.

The safest approach would be for the parties (or their advisors) to agree in advance what must be done. If that cannot be done then advisors must beware of seeking the answers within the pages of the lease (or any other documentation which might be relevant). It may well be necessary to inspect the property to ascertain whether the situation on the ground differs to what the documentation requires it to be and to seek expert input on the state of the market.

Having found against NHS the judge went on to consider what the position would have been had he concluded that the partitioning (and other constituent elements of the Works) constituted fixtures rather than chattels. Although the parties had differed on the chattels/fixtures point, they were at least agreed that if they were fixtures they were tenant’s fixtures rather than landlord’s fixtures.

NHS argued that the partitioning, as a tenant’s fixture, fell within the definition of "the Premises" in the lease and, consequently, had to be left in place. That definition (so far as is relevant) included:

"(a) the non load-bearing furnishings and coverings to

             (i) the main ceiling floors and walls of the Premises and

                        (ii) any main columns in the Premises

but not any other part of those main ceilings floors or walls or columns

(b) any internal non load-bearing walls inside the premises …

… so far as they exist at any time during the term."

NHS’s argument was that the partitioning constituted "non load-bearing walls". However, the judge did not accept this for two specific reasons: First, because elsewhere in the lease (in particular in a provision dealing with alterations) there was an express reference to "partitioning" (leading him to conclude that the lease did not regard "partitioning" and "walls" as the same thing); Secondly, NHS’s argument sat uncomfortably with the facts that (a) the licence permitted RPL to require reinstatement on termination of the lease or on the licence ceasing to have effect and (b) it would be commercially odd if a tenant were not (contrary to the usual position) entitled to remove tenant’s fixtures if it wanted to.

Again, this part of the judgment turned on a close consideration of the particular wording of the lease (and the relevant licence). There may well be cases where the particular wording of the lease (and/or other documentation) will amount to an agreement that the tenant will not remove what would otherwise have been tenant’s fixtures. It might be commercially unusual for such a situation to exist but, as we know from Arnold v. Britton [2015] UKSC 36, commercial sense is an aid to the construction of clear wording and not a throne before which clear wording must bow.

Finally, NHS argued that the installation of the partitioning constituted an alteration or addition to the premises which the lease only required to be reinstated in the event of a request to that effect by the landlord. This seems to have been accepted by RPL which met NHS’s argument with one based on the wording of the licence which contained this licensee’s obligation:

"If the landlord reasonably requires at the end or sooner determination of the Term or as soon as the licence … shall cease to have effect to reinstate …"

RPL argued that the words in italics were not qualified by the introductory words "If the landlord reasonably requires" which, rather, qualified only the words "at the end or sooner determination of the Term", such that reinstatement was automatically required on the licence ceasing to have effect which (the argument went on) was the case: the licence being conditional on works thereunder being approved by insurers, which approval was never sought.

The judge found for RPL on both parts of that argument.  The question of the construction of whether a request from the landlord was required on the cessation of the licence would not have been an easy call for a legal advisor prior to 24th September 2015.  But even had an advisor correctly advised on the proper construction of the license, it would not have been apparent from the documentation (with or without any inspection) whether all the conditions precedent to the lawfulness of the licence had been satisfied.  Again, therefore, it would have been impossible in those circumstances to advise as to whether the licence did or did not have effect and whether, therefore, the partitioning required to be demounted.

So, a sharp reminder that advising on compliance with break provisions in a lease is no easy matter.  Aside from making sure that a tenant has complied with his rent obligations (per the PCE case above) a legal adviser must not presume that all the answers are to be found within the four corners of the lease. In particular where works have been undertaken during the term it is likely to be necessary to consider the documentation permitting such works, the manner in which the works have actually been undertaken and even whether the manner in which the works have been undertaken may have an impact on the lawfulness of the works which have been undertaken. It is not surprising that there has continued to be regular litigation on the subject of break clauses. Like some leases, it is unlikely to stop very soon.

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Sally Wollaston
Sally Wollaston
Business Development and Marketing Director