Essential guide on vacant possession: How vacant is vacant?

Most lawyers are aware that when their client ceases to occupy a property, whether by way of a sale or expiry of a lease, they must give vacant possession ("VP").  This term is misleading in its simplicity and has been the subject of much debate in the Courts.  The consequence of not giving VP can be dramatic, especially in respect of conditional break clauses or any form of conditional contract; failing to provide VP in the former circumstance can result in an ineffective break clause and a continuing rental liability for the tenant.  In the latter, a failure to satisfy a condition of a contract potentially gives rise to rescission and damages.

In the second of our series of essential guides for the in-house lawyer, we look at what VP actually means and give some practical advice for landlords and tenants.

Does "Vacant Possession" affect me?

VP affects both residential and commercial property transactions; the seller and buyer when a property is bought or sold; and landlords and tenants when a lease is granted, transferred or terminated.   Vacant possession may also be relevant to third party occupiers. 

Both the Standard Commercial Property Conditions (Second Edition) and Standard Conditions of Sale (Fifth Edition) impose a contractual obligation on a property to be sold with VP (if incorporated into the sale and purchase contract without amendment).

A lease will often specify that on termination (by any method, including on the exercise of a break provision), the tenant must deliver up the property with vacant possession. 

If the obligation for VP is express, it will apply to all impediments to VP at the relevant date.  If the contract is silent as to VP it will be implied in any event (Cook v Taylor [1942]) although the authorities conflict as to whether that is the case in respect of break provisions.

Common Barriers to VP

  • Persons in occupation : e.g. trespassers, 1954 Act tenants, licensees, protected tenants, employees.
  • Physical impediments : e.g. furniture, left over stock, security measures, tenant's chattels.
  • Legal obstacles : e.g. property being compulsory purchased between exchange and completion.

The test

The cases of Cumberland Consolidated Holdings Ltd v Ireland [1946], John Laing Construction Limited v Amber Pass Limited [2004] (which considered the less onerous obligation to 'yield up') and NYL Logistics (UK) Ltd v Ibrend Estates BV [2011] are the leading authorities on the definition of VP. 

Following those cases, if either 1 or 2 below are satisfied then it is likely that VP has not been established. 

1. Use and intention. 

The seller/tenant continue to use the property for its own purposes in a non-trivial way (subject to de minimis) and that use is inconsistent with the purporting to return possession. 

The actions of the party required to give vacant possession do not show a clear intention to vacate the property.

2. Landlord's/buyer's ability to reoccupy

There is a "physical impediment" which presents a "substantial obstacle" to the landlord's/buyer's right of possession and enjoyment of a substantial part of the property. 

The landlord/buyer cannot reoccupy the premises without difficulty or objection.

Lord Justice Rimmer gave a useful summary of the existing principles in the 2011 Ibrend case:

"…the concept of vacant possession in the present context [the tenant was to give vacant possession to meet the conditions of its break clause], I consider, is not complicated.  It means what it does in every domestic and commercial sale in which there is an obligation to give 'vacant possession' on completion.  It means that at the moment that 'vacant possession' is required to be given, the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it.  It must also be empty of chattels, although the obligation in this respect is likely only breached if any chattels left in the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property…"

How the courts have practically interpreted the Vacant Possession obligation

What VP means in practice will depend upon the particular circumstances of the case (Topfell Ltd v Gallery Properties Ltd [1979]).  As such it is helpful to look at some of the factual scenarios where the Court has ruled that the obligation to give VP has been breached:

1. Where people are in lawful possession of the property under a lease or licence (Beard v Porter [1948]).

2. Where squatters were in unlawful occupation of the property (Cumberland Consolidated Holding Ltd v Ireland [1946], obiter dicta).

3. Where something is left in the property that substantially interferes with the physical enjoyment of the property but which may be removed e.g. large quantities of rubbish left inside the property (Cumberland Consolidated Holding Ltd v Ireland [1946]) or a large number of chattels such as furniture and personal goods (Scotland v Solomon [2002]) or indeed people carrying out repair works required to comply with lease obligations (NYL Logistics (UK) Ltd v Ibrend Estates BV [2011]).

4. Where something exists that is a legal obstacle to the enjoyment of the property, such as on order to requisition the property (Cook v Taylor [1942]).

A tenant should be particularly mindful of what constitutes a landlord's fixture, a tenant's fixture or a chattel since removal of tenant's fixtures and chattels will be necessary to comply with the VP obligation (Elitestone Ltd v Morris [1997]).  However, trade fixtures may be removed as long as this is not contrary to the lease provisions and will not cause irreparable damage (Climie v Wood [1869]).  In Legal & General Assurance Society Limited v Expeditors International (UK) Limited [2006] the Court found that chattels that constitute a "substantial impediment" to the use of a property cannot be left on it.  The Court stated that "If something has become part of the premises by annexation then it is part of the thing of which vacant possession has to be given.  Its presence does not amount to an impediment to vacant possession itself". 

Breach of Obligation to give Vacant Possession upon sale

If the seller fails to give VP the buyer's options are:

1. Apply to the court for an order for Specific Performance and claim damages;

2. Serve notice to complete (as defined in the contract), rescind the contract, recover any deposit paid and claim damages;

3. Complete the contract and claim damages (completion must be without prejudice to the right to claim damages);

Breach of the obligation to give Vacant Possession upon break

If the tenant breaches the obligation to give VP, the break will not operate and the tenant will have to wait until the next date when the lease may next be determined.  In a poor market this could have particularly dire consequences and a tenant might be minded to offer a suitably enticing release premium, albeit that the landlord is not obliged to negotiate with the tenant in this regard at all.

What to do with Chattels left on the property

If the obligation to give VP is breached the buyer/landlord cannot simply dispose of the remaining chattels, they must do what is reasonable in accordance with the ordinary common law principles. What amounts to 'reasonable' will very much depend of the particular circumstance of the matter and if relevant, will be considered in light of any express provision in the contract/lease.  We would recommend that you take legal advice to ensure that your actions do not leave you open to claim from the owner of the chattels.

A warning

The 2011 Ibrend case serves as a warning to tenants who do not mange their exit of a property with precision.  The facts of the case are that Ibrend's lease contained a tenant break clause exercisable on giving 6 months notice and conditional on Ibrend having paid its rent up to date and giving vacant possession of the property.  In April 2009, Ibrend served its break notice.  Ibrend could not carry out some of the repair works required under the lease (but not a condition of the break) before the break date and informed NYK of such.  The keys to the property were returned to NYK.  Ibrend completed the works within a week of the break date, but NYK sought a Declaration from the Court that Ibrend had not broken the lease as it had failed to give vacant possession on the break date.  NYK relied on the continued presence of Ibrend's contractors, security staff and items belonging to Ibrend.  NYK were successful and the lease was held to be continuing.  The presence of Ibrend's workmen after the break date meant that vacant possession had not been given. 

The crucial point is that Ibrend was not actually required to comply with its repairing obligations before the break date and should have fully vacated the property, leaving any outstanding repairs to be dealt with afterwards.  A bitter blow for Ibrend.  This is an example of the Court's continued harsh attitude towards a tenant’s compliance with property contracts.  In this case, even where a tenant was seeking to be helpful then the Court was unwilling to soften a tenant’s compliance with strict contractual obligations.

In summary, complying with VP obligations can be surprisingly difficult.  Recent case law suggests that buyers and landlords may be seeking to take advantage of that difficulty in order to assist them in difficult commercial times.  What is clear is that by not taking failing to take advice early, your client could end up embroiled in timely and costly litigation.  We are able to guide your client through those difficulties.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Adam Heather

Partner - Head of Real Estate & Executive Partner (Newcastle)

I am a Partner in the firm’s nationally renowned Real Estate team, working in both the public and private sectors.