When tenants become insolvent, landlords are usually keen to replace them with an occupier that can fill the void. In some cases, landlords will forfeit, or accept a surrender of, the tenant’s lease and locate another tenant. In other cases, the tenant’s receiver, administrator or liquidator may introduce a third party that is willing to take an assignment of the tenant’s lease or to take up occupation for a shorter term. In such cases, it is essential to establish what action has been taken, and by whom.
The lease will continue in full force if the tenant assigns its interest or allows another occupier into possession. By contrast, where a tenant requests its landlord to grant a new lease, or unequivocally agrees to another letting, the law will imply that the previous lease has been surrendered by operation of law to accommodate the new tenancy. However, an existing tenant that stands by while its landlord negotiates with a prospective new tenant is not a party to an unequivocal act that gives rise to an implied surrender of the existing lease by operation of law.
In QFS Scaffolding Ltd v Sable [2010] EWCA Civ 682; [2010] PLSCS 166, the landlord entered into negotiations with a new company, which had been formed to acquire one of the businesses run by a company in receivership, that was in occupation (initially with the company in receivership and latterly alone). However, the new lease was never granted. Consequently, the company took an assignment of the existing lease from the tenant’s receiver.
The landlord sought possession of the premises. It argued that the tenant’s lease had been surrendered by operation of law and that the new company had occupied under a tenancy at will, which had been determined.
The Court of Appeal held that it would be wrong to assume the existence of a tenancy at will and subsequently to ask whether the existing lease had been surrendered because this would involve assuming the answer to the question that was put to the court. It asked whether the parties’ conduct was inconsistent with the continuation of the existing lease. It ruled that such conduct must be unequivocal and decided that the fact that the landlord and the new company had discussed the grant of a new lease was not evidence that the landlord had actually granted a tenancy at will or licence to the new company.
There was no new lease and the parties had never reached the point at which an implied surrender might have occurred. Consequently, the existing lease continued in full force and effect and the landlord would not be entitled to possession unless it could show that the assignment was in breach of the alienation provisions in the lease and that it was entitled to forfeit as a result.
Practitioners will welcome this pragmatic decision. It illustrates how the law applies in such cases, which are an unfortunate result of the current economic climate.
Allyson Colby is a property law consultant
