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15/12/2009

Surrender by operation of law

In some cases, the end of a tenancy can be the most troublesome part. Jamie Hyams explains how landlords can protect themselves when dealing with the tricky subject of lease surrender

 

During these economically difficult times, a commercial landlord may find themselves in the unfortunate position whereby a struggling tenant wishes to surrender its lease and chooses simply to vacate its premises and/or hand back the keys to its landlord.

Where a tenant has vacated or returned the keys, a landlord must be careful not to do anything which may (inadvertently) give effect to the tenant’s purported surrender where there is no intention on the part of the landlord to do so.

A surrender can occur in one of two ways: either expressly by deed or by operation of law. The effect of a surrender is that the tenant’s estate vests in the landlord and the term of the lease is extinguished. For an express surrender to be valid, it must take effect immediately and be executed as a deed. Although preferable to enter into a formal deed, a landlord can accept a surrender by operation of law without having to execute a deed (this will not remove any obligation to pay stamp duty land tax).

For a surrender by operation of law to be effective, each party’s actions must be unequivocally inconsistent with the continuation of the lease. Where there is agreement between both the landlord and the tenant that the surrender will be effected by operation of law, usual practice is for a return to the landlord of the lease and ancillary documents together with the keys. The following cases serve as a useful illustration of the principles.

The case of Financial Corporation v Safaryan (2009) regards a large Victorian house in Holland Park that was let to a tenant for a term of three years at a rent of £390,000 per annum. The tenant made various complaints regarding failure by the landlord to carry out certain repairs relating to the central heating and swimming pool. On this basis and with still some fifteen months of the term left to run, the tenant claimed that it was entitled to treat the lease as at an end and vacated the property, returning the keys to the landlord.

After the tenant had vacated, the landlord redecorated the property to their own taste, used the property for parking its cars and a person associated with the landlord moved into the property for several months, bringing with him his furniture and other equipment.

The landlord’s solicitors wrote to the tenant stating that the lease was continuing and issued proceedings claiming the unpaid rent for the remainder of the term. The tenant’s defence was that the landlord’s conduct contradicted its claim that the lease was still in effect.

The trial judge held that: “The test is whether the landlord’s conduct is ‘so’ inconsistent with the continuation of the tenant’s lease that it could only be justified as being lawful on the basis that the landlord has accepted the tenant’s implied offer to give back possession and has taken possession of the premises beneficially for himself”.

The trial judge decided that the landlord’s actions amounted “to much more than merely protecting the property or seeking to make the best of the tenants having departed, and go significantly beyond anything consistent with the continued existence of the tenancy”.

The landlord appealed. The Court of Appeal upheld the trial judge’s decision in that the lease had been surrendered by operation of law. The Court of Appeal looked at the overall intentions of the landlord and not just at what was said in correspondence by the landlord’s solicitor.

Although some of the individual actions of the landlord could be justified, these – when taken all together – were inconsistent with the continued existence of the lease. In particular, the Court of Appeal held the following: accepting back the keys from a tenant is not in itself an acceptance of a surrender as one party has to hold the keys; if a tenant has vacated the premises and the landlord wishes to treat the lease as still in existence, it can still seek to mitigate its losses by seeking to re-let the premises and; if the landlord or someone associated with the landlord uses the property for its own purposes amounting then he re-takes possession of the premises inconsistent with the continuance of the lease, giving rise to a surrender by operation of law.

Although this case related to a residential property, the same principles apply to commercial leases. The position in law is that the Court will look at all the acts of the landlord, even though, in isolation, each independent act may be capable of being explained away.

Accordingly, each case will depend on its own facts. The case of Bellcourt Limited v Victoria Adesina (2005) indicates that a landlord may not be required to act positively in order to protect its position.

The tenant paid only half the required rent deposit and no rent and then vacated the property soon after term commencement, which was August 2000. By December 2000, the landlord was aware that the property was vacant but made no demands for rent or service charge and did not contact the tenant.

In November 2001, the landlord forfeited the lease for non-payment of rent and issued proceedings claiming for the arrears of rent up to that date. The tenant initially made various allegations of misrepresentation, undue pressure and unconscionability against the landlord, all of which were rejected by the trial judge. The judge permitted the tenant to raise in its defence that there had been a surrender of the lease by operation of law, a defence which had not been raised prior to the trial.

The judge held that, by around December 2000, the landlord was aware that the tenant had vacated and, in failing to demand rent and service charge, it had accepted the surrender of the lease. The Court of Appeal overturned this on the basis that the trial judge had been wrong to find that there had been the necessary unequivocal acts or conduct by the parties to amount to a surrender of the lease by operation of law.

The Court of Appeal held that “mere omission cannot…be unequivocal conduct of the necessary kind”. Although the landlord had failed to act by either taking possession or pursuing payment of rent, such omission had not unequivocally amounted to an acceptance that the tenancy had ended.

Each case will turn on its own facts and in assessing whether a landlord has accepted the giving up of possession by its tenant, it will not just be one action of the landlord that will be taken into account, but all of them. Alternatively, if a landlord chooses to acquiesce and not chase the tenant, this does not imply an acceptance of the surrender. What amounts to unequivocal conduct will ultimately be decided by the court.

Case law has shown that a landlord will always be permitted to protect its reversion. Relvok Properties Limited v Dixon (1973) illustrates that even changing the locks after the tenant has vacated the premises is not sufficient to show that the lease has ended – the principle being that the landlord is entitled to protect its reversion.

The danger of tenants wishing to vacate their premises and surrender their leases is not likely to go away in the short term. It is a function of the new economic reality. A landlord should therefore seek legal advice before responding to any proposal by its tenant wishing to surrender its lease.

Tips for Landlords
The following cases offer a guide to landlord’s conduct which amounts to an unequivocal acceptance of a surrender and should be avoided if the landlord is not inadvertently to accept a surrender:
- The landlord going into beneficial occupation of the property (Bird v Defonvielle, 1846).
- The tenant vacating upon the landlord’s request and the premises subsequently being demolished (Furnivall v Grove, 1860).
- The landlord granting a tenancy at will to the existing tenant (Gibbs MEW plc v Gemmell, 1999).
- The landlord accepting rent from subtenants who have been directed by the tenant to pay the rent direct to the landlord (Gray v Balls,1861).

These cases highlight conduct which does not amount to an unequivocal surrender by operation of law:
- The landlord accepting the keys by mistake or without prejudice (Proudreed Ltd v Microgen Holdings plc, 1996).
- The tenant abandoning part of the property (Chamberlaine v Scalley, 1992).
- The landlord accepting rent from a third party in occupation other than the tenant with no intention of effecting a surrender (Mattey Securities Ltd v Ervin, 1998).
- The landlord letting the property to a third party at the request of the (original) tenant (Nickells v Atherstone, 1847).

Jamie Hyams is an associate at Hogan & Hartson. Email: jhyams@hhlaw.com or visit: www.hhlaw.com

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