If in doubt, strip it out
Anna Ralston examines the vexed question of "vacant possession" and analyses the lessons from a recent High Court case.
The vexed question of what is vacant possession and how that applies to the factual position (and items) on the ground remains a key trap for tenants, and something about which both landlords and tenants should be well aware. In the case of Riverside Properties Limited v NHS Property Services Limited, a tenant's failure to remove demountable partitioning was held to frustrate the operation of the break clause.
However, each case does turn on its facts. Therefore, rather than being too guided by what is specifically decided in individual cases, parties are better to heed the consistent message that is emanating from courts of all levels that leases will be construed strictly (such as in Arnold v Britton) and break clauses are options for which strict compliance with any conditionality is required.
A tenant could be well advised to adopt the mantra of: if in doubt, strip it out. At a very minimum, joined up (and early) legal and building surveying advice about what is on the ground and how that interacts with the legal test of what constitutes vacant possession is highly recommended for all tenants navigating a break option conditional on VP.
VP – what is the fuss about?
"Vacant possession" or "VP" is one of those phrases that is commonly bandied about in the property industry. Perhaps in the context of being able to prepare some land for redevelopment or against the background of buying a building and whether it will come "empty" or subject to sitting tenants.
And it isn't often that one is forced to consider what "vacant possession" actually means. Unless it is in the context of a break option and more specifically when providing vacant possession is the pre-condition to whether a break has successfully been operated. Then one does really need to know exactly what "VP" means both legally and physically (i.e how that legal definition translates into the position on the ground).
If not and if a tenant, then one runs the risk of ending up in the undesirable position of having served a break notice, making plans to move on and then finding that the landlord contends that vacant possession has not been provided; that the pre-conditions to the break have not been met; and that the lease is still on foot. A messy (and potentially costly) situation for a tenant even if capable of being resolved without the involvement of the courts.
If you are a landlord, the complexities surrounding how the legal definition of what constitutes vacant possession applies to what needs to be done on the ground to ensure that this pre-condition has been met provides a potentially ripe opportunity.
Whether or not a landlord chooses to pursue the various angles to contest whether or not a tenant has successfully operated a break will often depend on economic drivers such as whether the rental value of the property has fallen or whether the landlord will find it easy to re-let the premises once the tenant has gone or whether it will be faced with a significant void period.
Defining VP – what's new?
Zooming in to look at the very specific facts of a recent decision from the High Court in Riverside Park Limited v NHS Property Services Limited, the court held that standard non-structural demountable metal stud partitions were chattels which substantially interfered with the landlord's right of possession. Therefore the pre-condition of providing vacant possession had not been met and the break did not operate.
On the narrow point about non-structural partitions, the case is a helpful clarification about how a well-advised tenant should deal with standard partitioning, which is a common alteration, in the lead-up to a break which is conditional on providing vacant possession.
The fundamental principles about the legal test for vacant possession did not change in this case. As decided in the 2011 case of NYK Logistics (UK) Ltd v Ibrend Estates BV, the test for vacant possession remains "that the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it. It must be empty of chattels, although the obligation [to provide VP] is likely only to be breached if any chattels left on the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property."
Impact of the case
Zooming out to look at the impact of the case more generally, it is important to flag that the case did not forever determine that all partitions will be chattels (as opposed to fixtures) or that necessarily just because there were chattels, vacant possession will not be given if the partitions were left in place. This is because each case will turn on its own facts.
For example, leaving chattels behind will only prevent vacant possession from being given if the remaining chattels are significant enough to prevent the landlord from immediately enjoying possession (which they were in this case). Equally, it is possible that there could be other cases in which the nature of the partitioning and how it was affixed may mean that it was held to be a fixture.
The classification of objects as either "chattels" or "fixtures" is a difficult one, dependant on a large number of factors which can vary from case to case. Therefore, how does a well-advised party navigate the vexed question of what needs to be done in order to provide vacant possession? The answer to this is: if in doubt, strip it out.
The impact of this may mean that significant works have to be undertaken before the break date. This underlines the importance of seeking joined-up legal and building surveying advice well in advance of the break date.
However, the risk of not stripping out "borderline" items (where it is unclear about whether they are fixtures or chattels) could be that the tenant remains on hook for its lease obligations until the next opportunity to break (if any) or until the end of the lease. At a minimum, the tenant potentially "gifts" its landlord the opportunity to contest the position and seek an advantageous settlement due to the uncertainty.
A word of warning: even in the event that it is certain (so far as possible) that an item is a fixture and not a chattel, this does not automatically mean that the item does not have to be removed in order for vacant possession to be provided.
The lease (and any licences) still need to be checked carefully to see if there is a requirement for tenant's alterations (whether a fixture or a chattel) to be removed because this can influence the position.
This further reinforces the mantra of: if in doubt, strip it out. Or at the very least, a tenant should make an informed and active decision about the costs of doing the strip-out works against the likelihood that not doing so could impact whether vacant possession has been provided (and the possible future costs of that scenario).
The vexed question of what is "vacant possession": likely to be less of an issue in the future?
For so long as vacant possession crops up as a pre-condition to the operation of break clauses, the vexed question of what exactly constitutes VP as a legal test and then how it applies to the facts (and items) on the ground will remain very relevant to both landlords and tenants (and will likely continue to provide disputes for the courts to adjudicate).
The Lease Code 2007 does recommend that vacant possession should not be a pre-condition to the operation of a break and, instead, replaced with: giving up occupation and leaving behind no underleases. However, many landlords do not currently subscribe to the Lease Code. Even if the position slowly changes for leases recently or currently being granted, there is still a long legacy of existing leases with yet-to-be-exercised break options that do contain this tricky for a tenant (but potentially useful for a landlord) pre-condition. Riverside Park Limited v NHS Property Services Limited is unlikely to be the last in the line of cases tackling the vexed question of what is "vacant possession". The next instalment is awaited.
Anna Ralston is a Senior Associate at Nabarro. She can be contacted on 020 7524 6590 or This email address is being protected from spambots. You need JavaScript enabled to view it..
