In the latest of our Building Blocks series, Jack Lightburn and Rachel Finn consider the tricky concept of vacant possession and its application in the context of commercial property transactions.
Vacant possession as a concept is relevant where one party is required to hand over property to another. An obligation to give vacant possession may be express or implied and typically arises where a seller or landlord has contracted to sell or lease land ‘with vacant possession’, although it can be relevant in other circumstances too, for example on the exercise of a break clause in a lease. In essence, an obligation to give vacant possession requires the party handing over the property to ensure that it is free of any physical or legal impediments, so that the recipient is able to enjoy immediate and unencumbered possession and occupation of it.
A vacant possession obligation is most often encountered in the following three scenarios:
- Lease termination: When a lease ends (however it ends), the tenant will almost certainly be required to hand back the property to the landlord with vacant possession.
- Break clauses: A common pre-condition for a tenant exercising a lease break clause is a requirement to hand back the property on the break date with vacant possession.
- Property sales: The seller may contract to provide vacant possession to the buyer on completion. Whilst this is the usual position, something else may be envisaged, for example the buyer may have agreed to purchase the property subject to existing occupational leases.
This article explores the meaning of vacant possession, focusing on when it may be required, considerations for each party and some common pitfalls to avoid. Unless the context indicates otherwise, we will use the terms seller/landlord and buyer/tenant interchangeably.
The meaning of vacant possession
Vacant possession is tricky to define, particularly as its meaning has evolved over time through a series of court cases spanning a range of different transactions, including property sales, lease termination and the exercise of break options, with the outcome of each case dependent on its specific facts. A more settled position has now emerged following these cases, although the test of whether vacant possession has been provided is always circumstance and fact specific.
There are now considered to be certain common features of vacant possession. The fundamental test is that the property must be handed over free of people, chattels and legal interests.
Free of people
The buyer must be able to assume and enjoy immediate and exclusive possession, occupation and control of the property. Therefore, the seller must ensure that no people remain at the premises, including those present without its authority (for example, trespassers), in order to give vacant possession.
In the context of the purported exercise of a break option in a lease which was conditional on vacant possession being delivered on the break date, a tenant which had retained a security guard and contractors on site after the break date failed to give vacant possession. It did not matter that the purpose of retaining such personnel - to finish some outstanding dilapidations works and to ensure the property remained safe whilst the works were carried out - was intended to benefit the landlord.
Free of chattels
Leaving chattels (loose items or belongings) at the property is prima facie evidence that a seller retains an intention to occupy it for their own purposes, which can support an argument that they have not provided vacant possession. If the quantity of chattels remaining is more than a trivial amount, the question to ask is whether the items left at the property substantially prevents or interferes with the buyer’s ability to use and enjoy a substantial part of the property. The property does not need to be completely empty.
The test can be summarised as follows:
- Activities of the seller: Are they using the property for their own purposes, other than a de minimis or trivial amount?
- Physical condition of the property: Is there a substantial impediment to the buyer’s use of the property or a substantial part of it?
If the answer to either of the above is ‘yes’, the seller is at risk of failing to give vacant possession.
Vacant possession has been held not to have been provided where a seller left behind cellars filled with a significant amount of rubbish and other items and also where a tenant failed to remove demountable partitions. In both cases, the court decided that these items constituted chattels depriving the other party of the enjoyment of the property and a significant physical impediment to its use.
However, in a case where a tenant removed too much, by stripping out essential fixtures and fittings, vacant possession was nonetheless held to have been given. This was despite the tenant’s actions leading to a substantial impediment to the landlord's ability to use the property. In this case, the court emphasised that the test for vacant possession is focused on the property being free from people, chattels, and legal interests, rather than its physical condition. The tenant had validly exercised the break clause (regardless of the property’s state of disrepair) and the landlord’s remedy was instead in compensatory damages.
Free of legal interests
The core consideration here is whether the buyer is able to freely occupy the premises without legal impediments. The existence of third-party rights over the property may therefore prevent vacant possession from being given. For example, a person will not comply with an obligation to give vacant possession if the property is handed back subject to an underlease.
Failing to provide vacant possession
The consequences of failing to provide vacant possession when required to do so will differ depending on the circumstances. In the context of the end of a lease, a tenant’s failure to provide vacant possession may result in the landlord pursuing a claim for damages or an order for possession. If a tenant attempts to exercise a break clause which is conditional on vacant possession being provided on the break date, and it does not comply with the condition, the break will not be effective and the lease will continue (unless the landlord waives the vacant possession condition). In the context of a property sale, a failure to provide vacant possession could entitle the buyer to damages or an order for specific performance, or in a worst-case scenario, it could allow the buyer walk away.
Best practice for complying with a vacant possession obligation
Although vacant possession cases often turn on their particular facts, there are certain steps that can be taken to try to ensure that vacant possession will be provided. These include:
- Removing all personal items and chattels;
- Removing all temporary structures or partitions (unless agreed otherwise with the other party);
- Avoiding keeping security personnel or contractors on site beyond the relevant handover date;
- Promptly handing over keys;
- Clear communication with the other party to alert them to any potential issues which may delay the provision of vacant possession; and
- Obtaining early legal advice, particularly if there is any uncertainty as to what is required.
Whilst compliance with a vacant possession obligation is the responsibility of the party handing over the property, whether or not it is complied with will be important for the other party as well, given that this will have an impact on their ability to take possession of the property and use it for their intended use. Therefore, unless there is a potential advantage to be gained from the other party failing to provide vacant possession (for example, a landlord who doesn’t want a tenant to break their lease), it would be prudent for the party taking possession to carry out the following steps:
- Provide clear instructions as to the condition in which it expects to receive the property, particularly in the context of a lease where there are reinstatement obligations which require prior notification by the landlord;
- Inspect the property before accepting it back to ensure all handover requirements have been met; and
- act reasonably and proportionately in assessing whether the other party has met the vacant possession obligation, noting the test is one of substantial interference with enjoyment and occupation of the property and therefore it may not be prudent or cost effective to pursue minor breaches.
Conclusion
The above is intended as a general overview of the concept of vacant possession and is not a comprehensive analysis of the relevant law and background. If you have any questions on the above or require advice in this area, please contact our real estate team.
Jack Lightburn
Rachel Finn