Vacant Possession – What Does It Really Mean?

Commercial leases commonly require tenants to provide vacant possession of premises upon expiry of the lease term, particularly when a tenant exercises a break option to end their lease early. However, the definition of vacant possession is notably unclear when compared to the popularity of its inclusion within leases.

What exactly is vacant possession?

It is vital that both landlords and tenants are aware of its scope and application in practice. Does the tenant need to remove all fixtures, fittings and chattels and return a ‘shell’? Must the premises be returned to the landlord in a state ready to be occupied without disturbance? Or does vacant possession simply mean the removal of all parties in occupation?

The approach to vacant possession has been the subject of debate and may have historically hinged on the landlord’s view. There is generally not a ‘one size fits all’ approach. The definition differs on a case-by-case basis and can be affected by other lease provisions.

Vacant possession – an example

The High Court decided, in the case of Capitol Park Leeds plc v Global Radio Services Limited [2021] EWCA Civ 995, [2020] EWHC 2750 (Ch), that a Tenant’s requirement to provide vacant possession, as a condition to exercising the break option, was not satisfied as the Tenant removed ceiling tiles, floor finishes, window sills and lighting, as well as other fixtures and fittings when vacating the premises. Therefore, the Tenant was unsuccessful when exercising its break option and remained bound by the lease until its expiry in 2025. The Court deemed the Tenant removed too many items and failed to deliver vacant possession as the lease defined “premises” to include all fixtures and fittings.

However, the Tenant successfully appealed the judgment and the Court of Appeal, in July this year, determined the break option was validly exercised.

The Court of Appeal reviewed the break option pre-conditions and identified the lack of reference to the repair and condition of the premises. The High Court’s interpretation of vacant possession referred to matters pertaining to the state of repair of the premises (i.e. returning with all fixtures and fittings) but the Court of Appeal said the term vacant possession should be defined according to the traditional trilogy of “free of people, chattels and interests”. As long as the Tenant ensured the removal of people, possessions and other interests, then vacant possession is properly given. As the Tenant complied, the Court of Appeal held in the Tenant’s favour and the break option was validly executed.

Where does this leave us?

The Court of Appeal has seemingly supplied a clearer definition that should assist parties to a commercial lease. However, validly exercising a break option often involves interplay between various pre-conditions so tenants (and landlords) should always consult legal advisors to offer clarity on their obligations and effective execution of the break.