The surrender of a lease must be effected by agreement between the landlord and the tenant. It may be formally documented or, where the parties’ actions demonstrate their intention to terminate the lease early, may be effected informally by operation of law.
Landlords should not be lulled into a false sense of security when accepting surrenders by operation of law. An informal surrender will not remove an obligation to pay stamp duty land tax or to satisfy third parties, including the Land Registry, that a lease has been properly terminated.
Weir v Area Estates Ltd [2010] EWCA Civ 801; [2010] 30 EG 62 (CS) underlines the dangers of cutting corners in such cases. The landlord accepted an informal surrender of a lease from its tenant before disposing of the property by auction. Unfortunately, the surrender was ineffective in law because a petition in bankruptcy had been presented against the tenant, who was subsequently made bankrupt. Importantly, the petition was registered as a land charge, and had been noted in the leasehold registers of title, which fixed the landlord with notice of the position.
The contract for the sale of the property by auction stated that it was sold with vacant possession and that the lease, which was still noted on the registers of title to the freehold one year later, had been determined by operation of law. The conditions of sale provided that the buyer “shall accept the position and shall not be entitled to require any further proof of the determination or raise any objection or requisition with regards thereto”.
The buyer sought to rescind the contract on the ground that the seller was unable to give vacant possession because the freehold title was encumbered by the lease. The seller argued that the special condition was designed to draw the buyer’s attention to the issue of the lease.
The Court of Appeal accepted that that the provision that vacant possession would be given on completion did not necessarily override the special condition in respect of the lease. It also accepted that a buyer may be compelled to accept the title offered by a seller that acts in good faith and specifically discloses any relevant defects in a clearly drawn condition in a contract for sale.
However, the contract for sale by auction contained an unqualified assertion that the lease had ceased to exist. A properly advised seller would or should have known that that statement was untrue. The court interpreted the unqualified statement that the lease had terminated as including an implied representation that the seller had taken reasonable steps to confirm its accuracy. Consequently, the buyer was allowed to rescind the contract and recover its deposit.
The decision illustrates the importance of checking the legal position carefully before accepting a surrender from a tenant and, where a title is defective, of including unambiguous provisions in contracts for sale that leave no room for doubt over the nature of the risks that are being transferred to the buyer.
Allyson Colby is a property law consultant
