There have been several instances lately where surrender of a lease by operation of law has been unsuccessful. A misunderstanding of what makes such a method of surrender effective has been detrimental to the landlord's position. The Court of Appeal recently set out its interpretation of the legal principle of surrender by operation of law as applied to the circumstances in the case of QFS Scaffolding Limited v Sable and another [2010] EWCA Civ 682. When the case was first heard, the judge had ruled, in favour of the landlords, that the lease had been surrendered by operation of law. However, the tenants appealed and the Court of Appeal held that the criteria as to whether or not a lease had been surrendered by operation of law had not been met in the circumstances.

Surrender

For a surrender of lease to be effective, the tenant must relinquish its lease to its immediate landlord, and the landlord must accept that. The combined acts extinguish the lease. There are two methods of effecting a surrender: expressly, by way of deed, and by operation of law. The preferred route is a deed of surrender, as the parties' acquiescence is clear and unequivocal. When surrender occurs as a result of operation of law, the surrender is constituted either by the subsequent actings of the parties constituting an acknowledgement of the tenancy being at an end, or by those actings being inconsistent with the continuance of the lease.

Differing perceptions

Mr and Mrs Sable were the landlords in a lease of a builder's yard for a term of 21 years to the London Demolition Company Limited (LDC). LDC used the builder's yard for two businesses: a demolition business and a scaffolding business. LDC were in financial difficulties in 2005 and just prior to the appointment of joint administrative receivers on 26 January 2006, had formed two other companies, one of which, QFS Scaffolding Limited (QFS) was set up to take over the scaffolding business of LDC. During 2006, QFS entered into negotiations with the landlords to take a new lease of the premises. QFS were in possession of the premises at the time of the negotiations and the landlords, acting on the basis that the lease had been surrendered by operation of law, regarded QFS's occupation as a tenancy at will.

The new lease negotiations did not result in a positive outcome between the parties and so the landlords sought to determine the tenancy at will and regain possession of the property. Meanwhile, however, QFS had obtained an assignment of the lease from the administrative receiver of LDC, and considered that it was therefore the new tenant under the existing lease. At the County Court in the landlords' action for recovery of possession, the judge, having decided in favour of the landlords, concluded that the lease had been surrendered by operation of law and made an order for possession.

The link between estoppel and surrender by operation of law

QFS appealed the decision. The Court of Appeal considered how previous judicial decisions had interpretated the legal principles for surrender by operation of law. The cases reaffirmed the link between the principle of estoppel and surrender by operation of law. The general principle of estoppel means that a party is prevented from denying or contradicting something previously asserted, in circumstances where that party has led another party to accept a position. The matter does not rely on intention, rather it arises by virtue of some act.

In this case, the landlords' arguments were not intended to rely on the general principles of estoppel, which meant that the Court did not have to concern itself with questions as to "reliance, or detriment, or change of position, or unconscionability, or whether the effect of the estoppel is temporary or permanent". The landlords were, instead, relying on the particular type of estoppel involved in the principles relating to surrender by operation of law. The Court made the observation that the principles of estoppel, as they relate to surrender by operation of law, seem to have evolved along their own path, and so the facts were interpreted in terms of the commonly understood textbook definition. Accordingly, the consequence of the acts of the parties must be such as to render continuation of the lease impossible; the behaviour of the parties must "unequivocally amount to an acceptance that the tenancy has ended".

The Court of Appeal analysed the conduct. The important party, for the purposes of surrender, was LDC. In particular, the Court looked at the conduct of LDC acting by its administrative receivers to ascertain whether or not its conduct was unequivocally inconsistent with the continuation of the lease.

It was noted that LDC had stopped using the property, had accepted QFS in occupation of the property, made no offer to pay the rent and did not acknowledge any liability for rent. In addition, the reports of the administrative receivers to creditors did not refer to the lease in any way. The arguments put forward on behalf of the landlords were that the landlords had granted a tenancy at will to QFS and LDC (acting by their receivers) had assented to this. The fact that the administrative receivers knew of the existence of the lease but made no reference in the receivers' report, indicated that the original lease was at an end. QFS argued that the lease was still in existence and that they had taken an assignment of that lease.

Actions must be unequivocal

The Court of Appeal took the view that the matter was being looked at the wrong way round. Instead of assuming the existence of a tenancy at will, and then attempting to establish whether or not there had been a surrender of the original lease, the first question must be whether or not the lease has been surrendered by operation of law. There was much discussion on the issue of an unequivocal act to ascertain whether or not surrender by the tenant had taken place by operation of law. The Court restated that there should be a "high threshold" when ascertaining whether or not the conduct of the parties is inconsistent with the continuation of the lease.

In this case, it was apparent that LDC had not positively carried out any act that could be described as unequivocal. Even through their administrative receivers, there was nothing done to surrender the Lease, which would, at best, lead to ambiguity. The Court of Appeal decided that there had not been any surrender by operation of law and, accordingly, LDC were the party who were entitled to possession. The subsequent assignment to QFS was, therefore, from a valid and subsisting lease. The Court of Appeal did not involve itself as to the matter of the consent of the landlords to that assignment.

High threshold set for unequivocal conduct

The Court of Appeal observed that the judge, at first instance, had not elaborated on what led him to the conclusion that a tenancy at will existed. It is fair to say that the conduct of LDC, having stopped its use of the property and not offering to pay any rent, etc, at a time when it knew that the landlords were negotiating a new lease of the property with QFS, points in the direction of a party who no longer regarded the lease as being in existence. However, the Court of Appeal did not consider this to be sufficient to constitute an unequivocal action from which to conclude that the lease had ended. The conduct must be beyond any doubt or alternative interpretation, and the landlord needs to be clear about this, before accepting the return of the property.

Another recent case that highlights the risks to landlords is Area Estates v Weir [2010] EWCE Civ 801, in which a seller took the view that a reference to a lease on the title sheet for his property was of no consequence in a sale, as the lease had been determined by operation of law. The tenant had vacated the premises and the landlord seller, who accepted the surrender of the lease, acknowledged this. However, the tenant had previously had a petition of bankruptcy lodged against it, and so was not actually in a position to surrender the lease without the consent of the court. Therefore, the lease was still in existence at the time of completion of the sale, entitling the purchaser to rescind the contract and demand the return of its deposit.

The strict approach shown by the Court of Appeal in applying a "high threshold" is to be favoured. In the interests of certainty, the conduct being assessed must be clear and unambiguous, to avoid the situation where contracts can be undone either because behaviour is misconstrued, or through lack of adherence to other legal formalities.

QFS Scaffolding Limited v Sable and another demonstrates the lesson that the only sure way to confirm the position for the landlord, who may be seeking possession of his property, is to formally and expressly enter into a deed of surrender with the tenant, having carried out all necessary searches.

Without having a clear understanding of the legal position, the landlords in this case found themselves in the position of having a tenant who, by virtue of an assignment from the receiver, was in occupation of the property without consent. The tenant, QFS, did make a request of the Court to the effect that the assignment was valid and properly vested in QFS, however the Court did not grant this. The Landlords may yet raise the issue that the assignment was granted without their consent, in breach of the alienation provisions of the lease.

To read the decision in QFS Scaffolding Limited v Sable and another click here.