Landlords that want to prohibit tenants from dealing with their leases must impose appropriate restrictions in clear terms, failing which tenants will be able to do as they please. The types of prohibited dealings should be made clear because tenants can part with possession of premises in numerous ways and the courts generally construe restrictions on alienation restrictively against landlords because the penalty for breach is forfeiture.
The wording used in commercial leases has been fashioned over time, in response to decisions by the courts. Most leases impose restrictions on assignment, underletting and parting with possession. It is also normal to prohibit tenants from holding premises on trust (because it has been held that declaring a trust for a third party is not an assignment or parting with possession). In addition, it has become normal to restrict the sharing of occupation (because it has been held that this is not parting with possession).
In BNY Trust & Depositary Co Ltd v Bourne End One Ltd [2009] PLSCS 309, the court ruled that such wording did not have the extraordinary effect of prohibiting the surrender, or the acceptance of a surrender, of an underlease (even though the effect of a surrender is that the tenant is obliged to yield up possession to the landlord). Consequently, landlords must use clear words, which admit no other meaning, to prohibit tenants from surrendering, accepting a surrender of or forfeiting a sublease, or from reducing the rent payable by a subtenant to preserve the value of or the income from an underletting.
The judge also rejected the landlord’s arguments that the acceptance of a surrender of an underlease (accompanied by a release of the undertenant’s covenants) constituted a breach of the tenant’s covenant not to waive the covenants given by the undertenant in the underlease. The judge held that the express release was not significant and did not transform the surrender into a breach of covenant that would not have occurred had the provision been omitted. The covenant was not, on its face, a covenant against accepting a surrender of the sublease and did not require the tenant to keep the sublease alive for its entire term. Waiver relates to breaches of the covenants in a lease that continues in force; a surrender brings a lease to an end.
In BNY Trust the landlord’s failure to prohibit the surrender, or the acceptance of the surrender, of an underlease enabled the liquidators of an intermediate leaseholder to negotiate to receive £100,000 in return for accepting a surrender from a subtenant. The liquidators subsequently disclaimed the intermediate lease and, because the surrender took effect before the disclaimer, the landlord was deprived of the ability: (i) (conferred on it by the terms of the licence to grant the underlease) to require the subtenant and its guarantors to take a new lease of the premises in place of the intermediate leaseholder; and (ii) to recover damages for breach of the alienation provisions in the licence to underlet and underlease.
Allyson Colby is a property law consultant
