The recent decision of the High Court in the case of Padwick Properties Ltd v Punj Lloyd Ltd [2016] EWHC 502 (Ch) serves as an important reminder to landlords, tenants, guarantors and managing agents that a lease surrender, if not by formal deed, requires the unequivocal conduct of both a landlord and tenant demonstrating an acceptance that a tenancy has ended. A tenant simply vacating premises or returning the keys to its landlord is, of itself, insufficient to being about a surrender by operation of law.

The facts

The case concerns a property called Sim-Chem House in Stockport ("the Property").

Padwick Properties Limited ("Padwick") was the Landlord. The Property was subject to a lease ("the Lease"). In 2006 the Lease was assigned to Simon Carves Limited ("SCL"), whose ultimate holding company was Punj Lloyd Limited ("Punj"). Punj entered into a guarantee with Padwick in which it guaranteed payment of all monies due to be paid under the Lease and in which it also covenanted to take a new lease of the Property, on the same terms as the Lease, if the Lease were to be disclaimed.

SCL encountered financial difficulties and was placed into administration by Punj on 7 July 2011. SCL ceased trading and its business and the majority of its assets were sold to Simon Carves Engineering Ltd ("SCEL"), another subsidiary of Punj. Within the terms of the sale, SCEL was granted a licence to occupy the Property. SCEL remained in occupation of the Property until 28 September 2011.

On 30 September 2011 the solicitors acting for SCL's administrators wrote to Padwick's solicitors to inform them that SCL had vacated the Property. In the letter the administrators asserted that "the security and safety of the Property will revert to your client". The keys to the Property were returned to Padwick some weeks later.

In 2013 SCL went into liquidation and the liquidators disclaimed the Lease.

Following SCL having been placed into administration in 2011, Padwick had taken steps to ensure that the Property was secured. Padwick had also sought to re-let the Property, with vacant possession, in late 2012. The Property was not however re-let and remained vacant before being subsequently taken off the market by Padwick.

On 19 December 2013 Padwick served notice on Punj pursuant to the guarantee demanding payment of rent and other monies due under the Lease and requiring Punj to take a new lease of the Property. Punj refused to pay the sums and to enter into a new lease, arguing that as a result of the parties' conduct, the Lease had thus been surrendered by operation of law and the guaranteed liabilities had been brought to an end.

Padwick issued proceedings on 15 May 2014.

The decision

The High Court found in favour of Padwick and held that there had been no surrender by operation of law. Punj was therefore liable to make payment of the sums owed under the Lease and to enter into a new lease of the Property.

The Court reinforced the general principle that a surrender by operation of law is a consensual transaction which requires conduct that is unequivocal on both sides which renders it inequitable thereafter for either party to dispute that the tenancy is at an end.

During the trial Punj argued that a number of facts, taken in conjunction, showed that there had been unequivocal conduct by Padwick accepting a surrender of the Lease on one of four alternative dates:

  1. At the end of September 2011 when SCEL ceased occupation of the Property and SCL were known to have no existing presence;
  2. When the keys were handed back to Padwick on 23 November 2011;
  3. When additional security measures were put in place in 2012; and
  4. When the Property was marketed for sale in October 2012.

The Court rejected the arguments forwarded by Punj and commented that:

  • SCEL's occupation of the Property was not an indication that the Lease had been already determined. SCEL was a licensee and the terms of the licence required it to pay the licence fee, an amount equivalent to the continuing liabilities under the Lease, to SCL's administrators and not to Padwick. A tenant cannot effect a surrender simply by vacating the premises
  • The receipt of the keys by Padwick was not inconsistent with the Lease being ongoing and was entirely consistent with a concern for the security of the Property. The keys were expressly accepted for reasons of security and not by way of a surrender
  • The changing of some of the locks at the Property by Padwick did not of itself amount to unequivocal conduct that was inconsistent with the continuation of the Lease as it is open to a landlord to protect the security of his premises and its state of repair. In each case it is a question of fact as to whether the landlord has done more than protect his interests, and the burden of proof lies with the tenant
  • The security measures put in place by Padwick also did not constitute an act inconsistent with the continuance of the Lease. Padwick had not gone beyond the protection of its own interests in securing the Property
  • The mere attempt to re-let the premises by Padwick did not give rise to a surrender by operation of law. The lease would however have been determined had the Property been successfully re-let.

Comment

This case highlights the need for all parties to take care in connection with the potential surrender of a lease.

Tenants need to be mindful of the difference between a landlord actually accepting a surrender and a landlord merely accepting back the keys to premises for the purposes of security or for safe keeping. Tenants cannot seek to surrender a lease unilaterally simply by vacating the premises.

Tenants and guarantors will need to establish unequivocal conduct on behalf of both parties amounting to an acceptance that the tenancy has ended, if they are to avoid ongoing liabilities.

Landlords need to ensure that both they and their managing agents are aware of the implications of their actions when a tenant seeks to return the keys to premises and that they do not inadvertently accept a surrender when they do not intend to do so. Keys should only be accepted if the landlord is happy to accept a surrender. Keys should be expressed to be received only for the purposes of safe keeping if no surrender is to be accepted or if the landlord has not yet decided whether or not to accept a surrender. Landlords should also be careful to ensure that they do not go beyond protecting their interest when they seek to carry out repairs to premises or when they put security measures in place.