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JULY 2011

The judgment of the Court of Appeal in June in NYK Logistics (UK) Ltd v. Ibrend Estates BV has highlighted one of the most common nightmare scenarios for tenants seeking to extract themselves from premises they do not require, namely the need for strict compliance with various conditions when exercising a break clause.  Guidance was usefully given as to how the tenant should proceed in such situations.

The tenant served a break notice in respect of a lease of a warehouse.  The break clause imposed a comparatively mild set of provisos for the validity of the break; first, the tenant must have paid all of the rent up to and including the break date and second it must have delivered vacant possession.  The clause expressly stated that if these conditions were not satisfied (unless the landlord waived them) the term would not cease.

With the break date fast approaching the landlord served what it called a “terminal” schedule of dilapidations.  The tenant argued that it was defective as it was not prepared by reference to a schedule of condition with the lease. Negotiations as to what remediation repairs should be done and in what timeframe then ensued.  The remediation proceeded with reasonable speed and, by two days before the break date, the works were substantially done save for what was agreed in correspondence as “a small number of works”.  At a meeting it was agreed that the works were substantially done but that a couple of days more work was needed.  On the morning of the break date, the tenant attempted to contact the landlord’s agent to arrange for handover of the keys, meter readings etc.  However the tenant kept its security guard on site and, three days later,  the tenant’s contractors returned to the premises and completed the small number of outstanding works over the next few days.  Further attempts to return the keys were avoided and the landlord, after taking legal advice, contended that the vacant possession requirement in the break clause had not been complied with.  Lord Justice Rimer showed sympathy for the tenant but it was far from enough to assist.  The tenant had tried before the break date to obtain agreement to hand back the premises, with a brief return subsequently as licencee, but the landlord had never agreed to that.  Indeed, the attempt cut the other way; the efforts of the tenant to seek that agreement showed that the tenant knew what was needed to ensure the effectiveness of the break!

Usefully, the judgment described what the tenant should have done.  It should have moved everyone away and cleared the premises, including the security guard.  It should have e-mailed the landlord to explain that  it was doing so, and that the keys would be delivered to the agent.  Only after the break date had passed should it have asked to return as licencee to complete the outstanding works items.  Following the judge's recomendations, the worst case scenario would have been a small dilapidations money claim.

This is a cautionary tale.  Compliance with break right conditions is something on which extreme care should always be taken, as such clauses are construed strictly against the tenant.  Legal advice should always be sought and always in good time.  Here the hurdle for the tenant was not high.  There was no nightmare of having to comply with a repair/yield up requirement before the break date; merely to give vacant possession and pay the rent.  A high penalty was paid by this tenant for merely doing what it thought it should; the diligent completion of the remediation works.

Mark Kendrick
Partner

If you would like any further information about the issues raised in this article please contact Mark Kendrick (mkendrick@gdlaw.co.uk) or any other member of Goodman Derrick LLP’s property team on 0207 404 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.