Watts Sector

The opportunities and pitfalls of vacant possession

In the current market, retail tenants often want to use the break clause in their lease to cut costs, take advantage of new tenancy rent-free periods and generally obtain more competitive terms. But beware vacant possession clauses – they may not be as straightforward as they first appear to be.

Landlords are frequently keen to keep existing tenants to avoid paying empty rates, the cost of re-letting and losing rental income. Failure to comply may result in the forced continuation of a tenancy. Break clauses in retail leases are often very onerous on tenants, being conditional on full compliance with lease covenants. However, in some instances they may only be conditional upon providing vacant possession, which is generally considered relatively simple to achieve.

In fact this is not the case. Vacant possession is an imprecise expression as there is no established legal definition.  Case law does not provide a clear or settled approach and tenants may be caught out if they do not fully understand what may be involved. Vacant possession is generally considered to be a ‘physical or legal impediment to enjoying the property’, which can entail different categories of obstacles, comprising: tangible impediments, persons in occupation and legal impediments. Where retail properties are occupied under a lease, the tangible impediments are often the key relevant category in complying with vacant possession at the break date.

Traditionally, the status of the items at a property (i.e. determining whether they are chattels or fixtures) are key to judging whether there is a tangible impediment to the enjoyment of the property at the break date.  While chattels (personal property) have long been considered a barrier to vacant possession, it is also considered that fixtures (fixed to land) installed by tenants may also constitute a tangible impediment that could cause the break option to fail.

Tenants wishing to vacate their current retail premises, should be aware of the issues thrown up by lease terms and understand the implications of vacant possession if compliance is specified. Landlords should also be aware of the potential opportunities and the strategies they can adopt to exploit the requirements of break clauses.  These opposing goals ordinarily converge during dilapidations negotiations close to the end of a lease or break date and often include discussions on vacant possession.
The terms of each specific lease are of paramount importance, particularly in respect of the break clause and yielding up clauses and monetary settlements paid to landlords often have a ‘surrender premium’ to effect the break.

Watts can advise both retail landlords and tenants on their respective options in association with their legal team to ensure that their overall operational strategy is achieved.

For more information, contact Ian Laurie, Director at Watts Group, on 0161 831 6180.

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