Whilst there is evidence that, especially in the retail market, the number of store closures and resulting empty units is at its lowest level since a peak in 2012, high profile announcements such as that of BHS mean that they are still a reality. The Court has, with this decision, provided a timely reminder of the principles of surrender by operation of law of which landlords, tenants and guarantors should be mindful.
It is well-established at common law that a surrender by operation of law will occur when the unequivocal conduct of parties to a lease is inconsistent with its continuation. As well as simply returning keys to the premises, it is clear that there must be some other act that demonstrates the landlord’s intention to resume possession.
These principles were recently applied in Padwick Properties Limited v Punj Lloyd Ltd. The court considered whether it was possible for a surrender by operation of law to take place where one party unilaterally divests itself of its obligations under a lease. It was held by the court that no, this was not possible – unequivocal conduct of both parties is required for a surrender by operation of law to occur.
Padwick Properties Limited (“Padwick”) were the intermediate landlord of a property called Sim-Chem House, Stockport. The property was underlet to Simon Carves Limited (“SCL”) whose ultimate parent company was Punj Lloyd Limited (“Punj”).
When SCL originally took assignment of the underlease, Punj entered into a deed of guarantee with Padwick. This guaranteed payment of all monies due under the Lease and said that, if the underlease was disclaimed or SCL otherwise ceased to be liable on its covenants in the underlease, Punj would accept a new underlease of the property upon the same terms.
SCL duly entered into financial difficulties and, on 7 July 2011, was placed into administration by Punj. SCL stopped trading and the majority of SCL’s assets were sold to another subsidiary of Punj, Simon Carves Engineering Ltd (“SCEL”). SCEL was granted a licence to occupy the property and they remained in occupation until 28 September 2011.
On 30 September 2011, the solicitors acting for SCL’s administrators wrote to Padwick’s solicitors to inform them that SCL had vacated the property and asserted that “the security and safety of the property will revert to your client”. The keys to the property were returned to Padwick some weeks later. In 2013 SCL went into liquidation and the liquidators disclaimed the lease.
Following the original administration, Padwick took steps to secure the property and briefly put the property on the market in 2012. However, it remained vacant. On 19 December 2013, Padwick gave notice to Punj pursuant to the deed of guarantee, requiring it to enter into a new underlease and demanding payment of monies due under the underlease. Punj argued that the lease had been surrendered by operation of law.
The court held that the lease had not been surrendered by operation of law and that Punj was liable to make payment of the monies owed and enter into a new underlease. In particular, they said that:
- SCEL’s interim occupation of the property was not an indication that the lease had already determined – this was merely a licence underneath the undertenant’s interest. Particular attention was drawn to the licence fee, which was payable to SCL’s administrators, not Padwick;
- The receipt and acceptance of the keys to property by Padwick was not, in itself, inconsistent with the continuation of the lease. In any event, Padwick had made it expressly clear that they only did so for maintaining security to the property;
- Additional security measures implemented by Padwick in early 2012 were not inconsistent with the continuation of the lease as they did nothing more than protect the landlord’s interest; and
- The mere attempt to re-let the premises did not give rise to a surrender by operation of law, although position would evidently be different if the property had been successfully re-let.
The case highlights the need for unequivocal conduct on the part of both parties for a surrender by operation of law to occur. A tenant cannot simply divest itself of a lease by walking away from the premises.
The decision also highlights the need for landlords to take care when faced with the return of keys to a premises from a tenant. In this case, the landlord’s agent was alive to the risk of a surrender by operation of law and was therefore careful to expressly state that the return of keys was only accepted to protect the landlord’s interest. However, the case implies that position may be different if no such express clarification is given.
There are risks for all parties, whether landlord, tenant or guarantor, when faced with a potential surrender by operation of law. For landlords, there is a real risk that an inadvertent surrender may occur where they go beyond mere protection of their interest. For tenants and guarantors, there is a risk that significant, long-term liabilities may accrue if they do not establish unequivocal conduct on behalf of both parties in treating the lease as at an end.