When a tenant goes into liquidation and its liquidator surrenders the lease what effect does this have on any obligations to remove any alterations that the tenant has made during the term and generally reinstate?  The high court has recently decided that the terms of a surrender that released both parties from rights arising “on or after, but not before, the date of this surrender” were sufficient to release the tenant from its obligations to reinstate the premises because these obligations were future obligations.

The case involved four separate leases of a floor in an office block.  Two licences for alteration had been entered into in respect of the premises, both requiring the tenant to dismantle and remove the works and reinstate the premises before the end of the lease.  Following the liquidation of the tenant its liquidators surrendered each lease on terms which released each party in respect of any future liability.  The landlord submitted a claim for over £1.2m in relation to the tenant’s liability to reinstate.  The landlord also claimed damages for the tenant’s failure to keep the premises in good repair.

The court held that the licences for alteration gave the tenant the full period of the term of the lease within which to carry out the reinstatement.  The “end of the lease” was the end of the terms that had been granted, not the end that came about because of the surrender.  As at the date of the surrender there was no breach of the obligation to reinstate and that the surrender had the effect of releasing that potential obligation.

The case also reviewed the method by which the landlord calculated the tenant’s liability for failing to keep the premises in good repair.  The landlord had taken into account a long rent free period that had been given to the incoming tenant because of the state of repair of the premises.  Instead it should have followed the procedure set out in section 18(1) Landlord and Tenant Act 1927 which limits a claim for damages for failure to keep premises in good repair to the amount by which the value of the landlord’s interest is diminished due to the breach.  Because the damages were not calculated in accordance with the Act the claim was not allowed.

Would the decision have been different if the liquidator had disclaimed the leases rather than negotiated a surrender?  There would have been no mutual release but case law holds that as between the landlord and the tenant, the disclaimer puts an end to any future liabilities under the lease.  The landlord and the tenant lose the benefit of any covenants which take effect on the expiry of the term, as if there were a surrender which did not keep those liabilities.  However, the landlord is able to prove in the liquidation under the Insolvency Act 1986 for any losses which are consequential upon the disclaimer.  Here, the landlord’s right to recover damages for the tenant’s failure to reinstate could have been preserved.

When making a claim in the liquidation, the case suggests landlords will need to consider the effect of section 18 and claim the lower of the cost of remedy and the loss in value for the claim to be admitted.

Law: Re Teathers Ltd (in liquidation); Baroque Investments Ltd –v- Heis and another [2012] EWHC 2886 (Ch)