Author: Janet Keeley
In difficult times tenants of commercial premises, particularly if they are insolvent, may try to escape future liability under a lease by an informal surrender. This usually entails vacating the property, returning the keys and writing to the landlord or its agents to say that the lease has been surrendered. Sometimes a third party is involved as a subtenant or licensee remaining in occupation, in the hope that the landlord will accept a direct relationship with them.
This is a high risk strategy for the tenant and any guarantor, but landlords should take advice at an early stage to avoid being caught out.
From a landlord’s perspective, to accept a surrender can be very damaging for a number of reasons. Possession of the property is returned, so business rates and other holding costs will fall to the landlord; guarantors and former tenants will be released from future liability although they may have been able to pay; obligations on guarantors to take a new lease may be avoided; and the landlord will be stuck with any sublettings, lawful or otherwise, entered into by the tenant beforehand.
It is therefore important for landlords to avoid inadvertently accepting a surrender. The recent High Court case of Padwick Properties Limited v Punj Lloyd Limited is an example of how to do just that.
In this case there was a lease for 21 years from 21 April 2000, with an annual rent of £784,268. The tenant went into administration. Initially a licensee was in occupation paying a licence fee equal to the rent, but that arrangement terminated. The landlord had kept invoicing the tenant for rent, and it was found to be acceptable for it to receive the payment of the licence fee direct from the licensee as rent paid on behalf of the tenant.
The licensee later vacated. The administrator delivered the keys to the landlord’s solicitor, said the property was vacant and told the landlord that it was now responsible for the safety and security of the premises.
The landlord made clear in writing that by receiving the keys, no surrender was accepted, and that the solicitor had no authority to dispose of a property interest on behalf of his client. Although the locks were changed to secure the property, this was not to exclude the tenant or its licensee, but to protect the vacant property from damage. The landlord marketed the property with vacant possession, but that of itself did not terminate the lease, and the landlord ceased doing so after only a short period, to avoid any misunderstanding.
The tenant alleged a surrender and later went into liquidation. The liquidator disclaimed the lease. The landlord’s solicitor, following the terms of the guarantee, required the guarantor to take a new lease in the same terms and demanded payment of the arrears. The guarantor refused, saying the lease had been surrendered.
The property was vacated in 2011 and the case was heard in 2016. The landlord succeeded and the guarantor was ordered to take a new lease and pay around £4 million for the arrears or rent and interest. In consequence of the decision the business rates would also fall to the guarantor.
In this case the landlord took advice early and protected its position in writing. All the circumstances were taken into consideration. A tenant cannot surrender a lease unilaterally. The landlord’s actions were not inconsistent with the lease or the proper protection of its reversionary interest in the property. The procedural steps necessary to require the guarantor to take a new lease were followed correctly and in a timely manner.
So, an expensive lesson for the guarantor, with no opportunity to trade, sublet or assign to lay off risk in the lost years whilst the dispute was in progress; and vindication for the landlord, as the guarantor was a strong covenant and able to pay. Prompt and careful consideration of the legal and commercial issues saved the day.
Janet Keeley, Partner, Fladgate LLP (firstname.lastname@example.org)