If a landlord and tenant wish to enter into an enforceable agreement to surrender in relation to a lease which is protected by the Landlord and Tenant Act 1954, they must first follow the contracting-out procedure authorised by that Act.
The procedure is similar to that followed prior to the grant of a new, excluded, lease. The landlord must serve a notice on the tenant warning it that by entering into the agreement it will be giving up its right to a new lease under the Act. The tenant must then make a declaration (or statutory declaration) to confirm that it understands and accepts this.
In Ultimate Leisure Ltd v Tindle, a seller tried to use to its advantage the fact that it had not followed this procedure, to avoid a contract for the sale of the reversion.
The seller owned the freehold of premises which were let on a 99 year lease to its wholly owned subsidiary. The seller granted an option to the buyer to purchase the freehold. That option was subsequently exercised.
The option agreement was tripartite, between the seller, the tenant and the buyer. That was because it was part of the deal that, immediately prior to completion, the tenant would surrender its lease to the seller. This constituted an agreement to surrender, which was void for non-compliance with the statutory procedure.
The seller claimed that, as a consequence, the agreement for sale arising out of the option agreement was also void.
The court found that the seller was contractually obliged to sell the property free from the lease and to deliver a deed of surrender to the buyer on completion. The Act only rendered void the agreement to surrender and not the sale contract itself.
The seller was therefore in breach of its obligations under the sale contract. If it were not within the seller's power to deliver the deed of surrender, the buyer would either have to take the title that was offered (i.e. subject to the lease) and sue for damages, or treat the agreement as terminated by the breach.
If it was within the seller's power to procure execution of a deed of surrender, the buyer could ask for specific performance of the sale contract. As the tenant was a wholly owned subsidiary of the seller, it was within the seller's power to procure the deed of surrender.
Things to consider
The contracting out procedure must be followed in relation to an agreement to surrender a lease which is protected by the Act, as well as on the grant of new excluded leases. Buyers should require evidence that the procedure has been followed prior to exchange.