Padwick Properties Limited v Punj Lloyd Limited [2016] EWHC 502 (Ch)

FACTS

This case concerned a property in Stockport let at an annual rent of £784,268, where Padwick was landlord to a company named SCL. The defendant had guaranteed SCL's performance of its obligations.

SCL was placed into administration in July 2011 but its assets were sold to a group company, SCEL. SCEL was granted a licence to occupy the property and it remained there until 28 September 2011. On 30 September 2011, SCL's administrators informed Padwick's solicitors that SCL had vacated the property and that the "security and safety" of the property would revert to Padwick. This followed exchanges of correspondence between the parties during which Padwick had reminded the administrators that SCL and the guarantor remained liable under the lease and should make appropriate arrangements to secure the property.

Padwick arranged for the property to be secured soon after SCL/SCEL vacated, not least because some doors there had been left open. At the insistence of Padwick’s insurers, 24 hour security arrangements were put in place from October. Sometime later, in an effort to reduce the security costs and in consultation with its insurer, Padwick installed alarms and security screens over the property’s windows. 

In November 2011, the administrators returned the keys to Padwick’s solicitors and confirmed their intention to surrender the lease. Padwick only decided to accept the keys once it was told by the administrators that the keys would otherwise be thrown away. However, it was made clear to the administrators that Padwick was not accepting a surrender of the lease and this was subsequently noted in the administrators’ progress report. Padwick’s correspondence consistently rejected the suggestion that the administrators could simply divest themselves of responsibility for the property and it continued to demand that the guarantor should adhere to its obligations. 

In October 2012, Padwick’s briefly marketed the property for sale with vacant possession, until it was advised against doing so in order to protect its potential claim against the guarantor. SCL subsequently went into liquidation and the lease was disclaimed. Padwick gave notice to the guarantor requiring it to take a new lease. The guarantor challenged this on the basis that the lease had been surrendered and that it therefore had no continuing liability under its guarantee. In support of its argument, it relied on Padwick’s steps to secure the property and market it for sale, as well as the acceptance of the keys.  

DECISION

The court reminded the parties that surrender by operation of law is “a consensual transaction, constituted by conduct that is unequivocal on both sides and that renders it inequitable thereafter for either party to dispute that the tenancy has ended”. It also reiterated that the consensual nature of the transaction has to be tested objectively and that the burden of proof is on the party asserting that the surrender has taken place.  

The court highlighted the helpful guidance on this area of the law as approved by the Court of Appeal in Artworld Financial Corp v Safaryan [2009] EWCA Civ 303, which included the following points:

  • conduct has to be evaluated as a whole and the question of whether there has been a surrender does not depend on a stated intention/assertion
  • accepting keys without more will always be equivocal
  • acts which are consistent with a landlord's rights under the lease, e.g. entering to inspect, do not give rise to a surrender in themselves because they are not necessarily inconsistent with the lease continuing
  • acts by the landlord which amount to protecting/preserving the property do not give rise to a surrender in themselves because such self-help is a reasonable response to a tenant's stated intention not to perform its lease obligations
  • a landlord's decision to try to re-let the premises is reasonably to be expected and will not necessarily constitute a surrender as a landlord must be able to seek to mitigate its loss
  • any use of the premises for the landlord's benefit which goes beyond the totally trivial - and certainly where it amounts to occupation of the premises - will constitute a retaking of possession which is inconsistent with the continuation of the lease and will give rise to a surrender.

In this case, the court's view of the landlord's various actions was as follows:

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In short, the court concluded that "Padwick was in a position to take possession whenever it chose to do so. In fact, it has not chosen to do so." As a result, the court rejected the guarantor's assertion that there had been a surrender of the lease and required it to comply with its obligations. This meant an order to pay over £4m and to take on a new lease of the property.

COMMENT

Landlords will no doubt be pleased to see another clear direction from the courts that cases must be judged on their circumstances and that landlords will not be penalised for taking reasonable steps to protect their property interests when a tenant decides to leave premises - provided that their overall conduct unequivocally recognises the continued existence of the lease and they do not retake possession.

The decision also emphasises the importance of ensuring clear communication in these situations, as the landlord's consistent rejection of the suggested surrender supported its case. These principles should also apply in circumstances where there is a dispute as to whether a tenant has validly exercised a break option.