Vacant Possession – the elephant in the room?

Picture this. The economy is on the up and your business is doing well. You’re looking to grow. And your lease has a break clause fast approaching – so you’re looking at exercising this break to make a move, to go onwards and upwards, taking advantage of new tenancy rent-free periods and obtaining more competitive terms.

It sounds so simple – but in commercial leases, there are clauses that tenants must treat with caution and understand thoroughly. One such clause tenants should be aware of is vacant possession clauses – which are rarely as straightforward as they seem.

Break clauses in commercial leases are often very onerous on tenants, being conditional on full compliance with various lease covenants. However, exercising a break clause is always conditional on ‘yielding up’ a premises with vacant possession, often referred to as VP. This is an obligation we have found is consistently misunderstood by tenants – and interpreting them incorrectly can have dire consequences.

Yielding up a premises with vacant possession is rarely simple – it’s an imprecise expression with no established legal definition. There’s no definitive guidance provided by case law, and frequently, tenants emerge unhappy from a legal tangle over VP.

Broadly, VP is when a tenant must give back full possession of the property to the landlord, with unhindered access and ‘enjoyment’ to all areas. It’s this ‘enjoyment’ that can prove problematic, with potential issues including tangible impediments, persons in occupation and legal impediments. In commercial premises, which are almost always occupied under a lease, the ‘tangible impediments’ are often the key relevant category in complying with VP at the break date.

Traditionally, the key to understanding what is a ‘tangible impediment’, is a clear determination between what items at the property are chattels (personal property, not fixed to the property – e.g loose furniture) and fixtures (fixed to the property – e.g demountable partitions). While chattels have long been regarded as items that cause a barrier to VP, recently we have experienced fixtures installed by tenants that may also constitute tangible impediment that could cause a break option to fail.

VP is an implied term within every commercial lease, so it applies to all tenants who occupy a premises under a lease. It’s therefore imperative that you understand your leasehold obligations in order to achieve vacant possession. This will provide the best preparation to construct a sound and reasoned argument about keeping possible tangible impediments in place, if this is the intention.

The key really lies in a full and clear understanding of the yielding up obligations. It can’t be stressed enough how important it is to get this right – failure to comply at a break date would result in the lease continuing until the next break date (likely to be a few years’ hence) or lease termination.

Failure to comply at the end of the lease, meanwhile, would mean the landlord is entitled to another quarter’s rent until VP is provided. Getting it wrong by misunderstanding your obligations is clearly something that can severely inhibit your business ambitions. Our suggestion is that you take advice – it will give you peace of mind and allow to focus on what you do best.