Mourant Property Trust Ltd v Fusion Electronic (UK) Ltd

Break clauses in leases are subject to strict compliance with their contractual conditions precedent. A tenant must deliver genuinely vacant possession on the break date and must not be in material breach of its covenants.

Materiality is assessed objectively. The relevant question is whether the breach would affect the landlord’s ability to relet or sell the premises without delay or additional expenditure. The tenant’s motive and the existence of security for the landlord’s claim are irrelevant. Where keys are retained so that contractors, equipment or materials remain on the premises, vacant possession has not been delivered.

The claimant was the freehold owner and the defendant was the tenant under two substantially identical warehouse leases. Each lease contained a break clause subject to conditions precedent requiring vacant possession, payment of sums due and no material breach of covenant.

The defendant served notice to determine the leases on 19 March 2008. On that date repair works remained incomplete, contractors and their equipment remained in the warehouses, and the defendant retained keys. The claimant refused to accept the keys and contended that the conditions had not been satisfied. The defendant relied on the alleged immateriality of the outstanding works and on estoppel arising from a schedule of dilapidations and accompanying correspondence.

The central issues were whether vacant possession had been delivered, whether the outstanding dilapidations were material, and whether the claimant was precluded from relying on the contractual conditions.

1. The claim succeeded. The break clauses had not been validly exercised, the leases continued, and the claimant was entitled to the relief sought.
2. Conditions attached to the exercise of a lease break option must be strictly complied with. The defendant had not delivered vacant possession. It offered most, but not all, of the keys, retained keys so that its contractors could continue working, and left tools, equipment and materials on the premises. The claimant had not been given the immediate choice of taking possession with the works incomplete. The refusal to accept the keys therefore did not prevent reliance on the unfulfilled condition.
3. The outstanding dilapidations were material. Applying the objective approach in Fitzroy House Epworth Street (No 1) Limited v Financial Times Limited [2006] EWCA Civ 329, reported at [2006] 1 WLR 3207, the court assessed the likely effect of the disrepair on reletting, using market rent and allowing for matters which an incoming tenant would raise in negotiation. The evidence established that the disrepair would probably result in a substantial rent-free period.
4. The existence of a bond held as security was irrelevant. Materiality depended on the nature and extent of the disrepair and its effect on the lettability of the premises, not on the landlord’s ability to recover compensation.
5. The alleged estoppel failed on the facts. The defendant had not relied on the schedule or accompanying letter, and the documents did not amount to a representation that strict compliance with the break conditions was unnecessary.