News & Views

Breaking Bad Leases – the latest pitfalls in exercising break clauses

With the dust having firmly settled and break clauses tweaked following last year’s landmark case of Marks & Spencer plc v BNP Paribas, where it was deemed that rent paid in advance before a break date would not have to be refunded for the post break period unless the lease expressly stated this, a new development in breaking a lease has again reared its head…vacant possession.

Vacant Possession – a term so often included in Heads of Terms as a condition to a break clause, or perhaps as a condition when returning a premises to a landlord at the end of the lease term. A tenant may mistakenly believe that this means they have to return the premises free from their occupation, unfortunately, it can be a lot more complicated than this, particularly in light of recent case law.

The recent cases of Riverside Park Ltd v NHS Property Services Limited [2016] and Secretary of State for Communities and Local Government v South Essex College of Further and Higher Education [2016] serve as a reminder that the obligations on a tenant when giving vacant possession are a lot more burdensome than one might think. In both cases the tenant sought to exercise their break clause but the court found that they had failed to give up vacant possession of the premises. In both instances the tenants had left office partitions in place, both deemed to be tenant’s chattels, and thus substantially prevented or interfered with the landlord’s use and enjoyment of the premises. The tenants’ attempts to break their leases had failed and their liability under the lease including payment of rents, the service charge and adhering to the tenant’s covenants, therefore continued. This was a costly mistake which tied NHS Property Services Limited into another five years of lease liabilities.

Practically, a tenant should consider their position at the outset of any transaction.  Based on the evidence above a tenant should try and resist accepting vacant possession as a condition to a break clause when negotiating the Heads of Terms. A more appropriate concession would be to give up the premises free from any rights of occupation, this reduces the burden on the tenant.

Tenant’s should carefully consider their position when serving a break notice and should take advice on the terms of their lease and any collateral documents. Seeking legal advice as early as possible in the process will help negate the possible obstacles that the conditions of the break clause may present. This can be the difference between successfully terminating your lease or inadvertently continuing your liability.

For further information on this or any Landlord and Tenant queries generally please contact our property team to discuss.


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