Padwick Properties Limited and Punj Lloyd Limited [2016] EWCH 502 (Ch)

Summary

The High Court has rejected the arguments of a tenant’s administrators, who claimed that a lease had been surrendered by operation of law because of the landlord’s actions. In this instance the landlord had been notified that the property was vacant, had changed the locks, had installed security in the property, had accepted the keys and had put the property on the lettings market. However, surrender by operation of law is a consensual transaction, and the Court found that the landlord had made it clear in correspondence with the tenant’s administrators that it did not consent to the surrender, nor accept that it had occurred.

The facts

In 2006, the lease of Sim-Chem House in Stockport was assigned to Sembcorp Simon Carves Limited (later renamed to Simon Carves Limited) (“the Tenant”). Punj Lloyd Limited (“the Guarantor”) was the ultimate holding company of the Tenant, which entered into a deed of guarantee with Padwick Properties Limited (“the Landlord”). The Guarantor guaranteed all monies due under the lease and undertook to observe and perform all of the covenants and conditions on the Tenant’s part in the lease. The Guarantor also agreed to accept a new lease of the premises upon notice from the Landlord, if the Tenant ceased to be liable on its covenants in the lease.

In 2011, the Tenant went into administration and its administrators (“the Administrators”) informed the Landlord that, from that point onwards, the security and safety of the property was in the Landlord’s hands. The Administrators sent the Landlord the keys to the property, along with a letter stating that it wished to surrender the lease by operation of law. The Landlord told the Administrators that it would hold the keys for security only, and explicitly stated that the surrender was not accepted.

The Landlord then took steps to secure the property (at the insistence of its insurers) and even put it on the market, though only for 3 weeks. Throughout 2012, the Landlord continued to contact the Administrators and the Guarantor, stating that the Guarantor was liable under the guarantee and denying that the surrender had occurred.

In 2013, the Tenant went into liquidation and the lease was disclaimed. The Landlord gave notice to the Defendant under the deed of guarantee, requiring it to enter into a new lease and demanding rent payments. However, the Defendant argued that the lease had been surrendered by operation of law and that therefore they had no liability under the guarantee.

Surrender by operation of law

Surrender by operation of law is a consensual transaction, under which the conduct of the landlord and tenant amounts to an acknowledgement that the tenancy has ended.

The Defendant’s case in this instance was that the Landlord’s actions demonstrated its unequivocal acceptance of a surrender of the lease on four occasions:

  • when the Tenant left the premises and alerted the Landlord, who then changed the locks;
  • when the keys were returned to the Landlord and not sent back to the Tenant;
  • when additional security measures were implemented by the Landlord to protect the property; and
  • when the property was marketed by the Landlord for sale.

The decision

The Court addressed the Defendant’s arguments in turn.

  • It was held that tenants could not effect a surrender simply by vacating premises. In this instance the locks were changed owing to the Landlord’s security concerns, as opposed to any intention of excluding the Tenant.
  • It was held that the Landlord’s decision to hold on to the keys was entirely consistent with its intention to secure the property and did not indicate a retaking of possession from the Tenant. This was further supported by the fact that the Landlord had expressly stated to the Administrators that the keys were accepted for security only.
  • In respect of security, the Court held that the test is whether a landlord has gone beyond merely protecting its own interests, by protecting the security of the premises. It was held that the Landlord had not, and had merely protected its property from a serious risk of damage.
  • Finally, it was held that if the property had been re-let, then the Lease would have determined. However, merely attempting to re-let, which was in the best interests of both parties, was not enough to establish a surrender.

Accordingly, the claim that the lease had been surrendered failed and the Guarantor was obliged to take a new lease.

Why does it matter?

This decision helps to clarify the rules regarding surrender by operation of law. Most importantly, the surrender must be shown to be a bilateral decision of both tenant and landlord, in order to be effective. The outcome of this case is perhaps unsurprising, considering the constant stream of correspondence in which the Landlord clearly indicated that agreement was not given. The Court made it clear that it was not possible for the Administrators to simply declare that the lease had been surrendered and divest themselves of any responsibility in respect of the property.

Our advice is that the most secure way to ensure an effective surrender of a lease is firstly to seek unequivocal agreement from the landlord/tenant and then to record such agreement, ideally in a deed.