There is a common belief that a tenant can successfully surrender a lease that it no longer requires without the need for any formal documentation if it returns the keys to the property to the landlord and the landlord retains them. The recent decision in Padwick Properties Limited v Punj Lloyds Limited  EWHC 502 (Ch) has provided useful guidance on the circumstances in which a surrender of a lease can take place by operation of law (ie. without the need for a formal deed) and shows that retention of the keys by the landlord may not be sufficient for a surrender to take place.
In this case, the tenant of a property (SCL) went into administration and its assets were sold to a group company (SCEL), which briefly occupied the premises under a licence from the administrators. The administrators then advised the landlord (Padwick) that the property had been vacated and that the “security and safety” of the property would revert to Padwick. On discovering that some doors to the property had been left open, Padwick arranged for the property to be secured and, at the insistence of their insurers, arranged for 24 hour security at the premises.
SCL’s administrators subsequently returned the keys to Padwick. However, Padwick’s representatives made it clear to SCL’s administrators that they would not accept a surrender of the lease. Padwick then briefly marketed the property for sale with vacant possession.
When SCL subsequently went into liquidation and disclaimed the lease, Padwick took action against the guarantor (Punj) for recovery of rent and insurance premium arrears and an order that Punj were obliged to take a new lease pursuant to the terms of the lease. Punj claimed that the lease had been surrendered by operation of law and proceedings were issued.
The court’s ruling
The court ruled that there had been no surrender of the lease and ordered Punj, as guarantor, to pay arrears of around £4million and also to take on the new lease. The court found that the following events were consistent with the lease continuing:
- The temporary licence granted to SCEL – particularly as the fee was paid to the administrators.
- The security measures implemented – as they were to protect the landlord’s interest.
- The acceptance of the keys by Padwick – as they made it clear that they were held to maintain security.
- The attempt to re-let the premises – found to be a reasonable course of action in the circumstances.
This decision was based on the landlord’s conduct as a whole, which was found to have unequivocally recognised the continued existence of the lease. It does not give landlords the right to accept keys and market premises without fear of a surrender occurring. If they choose to accept the keys to protect their interest in the premises and maintain security, they must make it clear in writing to the tenant that they are doing so for that purpose only and that the lease, including the tenant’s right to occupy the premises, is continuing.