What is Surrender?
By a tenant surrendering his tenancy, his leasehold interest becomes merged in his landlord’s freehold interest. A Surrender can be achieved in one of two ways.
Express surrender: This is a surrender which is put into writing. To be valid it must be by deed. For the surrender of a tenancy protected by the 1986 Act, or a business letting protected by the 1954 Act, it must be prepared by a solicitor, otherwise the author is committing a criminal offence. The Legal Services Act 2007 only authorises accredited land agents to prepare deeds of surrender in relation to farm business tenancies.
The tenant must give up vacant possession of the premises and the landlord accepts that the tenancy is at an end.
A deed of surrender should cover:-
- The extent of the land being surrendered;
- Compensation payable to the tenant;
- The tenant’s right to remove fixtures;
- The landlord’s claim for dilapidations;
- The transfer of entitlements;
- Rent to the date of surrender;
- The effect on any environmental schemes;
- If it is a surrender of part, whether any alterations are needed to the terms of the tenancy, particularly with regard to rent;
- Removal of the tenancy from the registered title.
A tenant should always be advised to seek independent legal advice on the surrender documents.
Implied Surrender/Surrender by operation of law:
This arises where the conduct of the landlord and the tenant amounts to an acknowledgement that the tenancy has ended. For example, the tenant vacating the premises and handing back the keys to the landlord who accepts them unconditionally.
Alternatively there may be an implied surrender if a tenant allows the landlord to resume possession of the holding to carry out works, excluding the tenant entirely. Even if these changes are documented in a Deed of Variation of the tenancy agreement which provides that the tenancy continues despite these changes, a fundamental change to the tenancy could still operate as an implied surrender. It is therefore very important to consider whether the proposed changes could operate as an implied surrender, regardless of how they are labelled.
The surrender of a tenancy, by whichever method, will have tax consequences, particularly if a tenant is receiving a payment in return for the surrender. It is important to seek legal and tax advice on the structure of a surrender before finalising heads of terms to ensure that clients are not landing themselves with significant tax liabilities which could otherwise have been avoided.