In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to surrender of leases
Surrender checklist
- What is a surrender?
- How does a surrender occur?
- When does an express surrender need to be preceded by agreement to surrender?
- What are the elements of an express surrender?
- What are the elements of a surrender by operation of law?
- What needs to happen for a surrender by operation of law to occur?
- What happens if a surrender by operation of law occurs by accident?
- What is the difference between surrender by operation of law and abandonment of a tenancy?
- What happens to undertenants on a surrender?
- Can a surrender occur at any time?
What is a surrender?
A lease is surrendered when the landlord and the tenant agree that it will come to an end. If the surrender is effective, that is what happens. In theoretical terms, the tenant’s interest is acquired by the landlord: the tenant is transferor and the landlord is transferee.
The landlord becomes re-entitled to possession and the tenant is released from its obligation to pay rent. Both landlord and tenant are released from liability for the performance of all obligations under the lease, though they will remain liable for crystallised losses in relation to existing breaches (such as terminal dilapidations liability) unless such sums are settled expressly. The same goes for the tenant’s guarantor (Torminster Properties Ltd v Green [1983] 1 WLR 676; [1983] 2 EGLR 30).
Where the reversion on the lease or term of the tenancy vests in more than one landlord or tenant jointly, a surrender is only effective if made and accepted by all of them. This contrasts with the rules concerning giving a notice to quit a periodic tenancy vested in joint tenants, when the notice can be valid and effective if given by only one of the joint tenants.
How does a surrender occur?
There are only two ways: (i) expressly, by deed; or (ii) impliedly, by operation of law. The latter arises when the parties behave in a way which is inconsistent with the continuation of the tenancy and it can happen irrespective of the parties’ actual intentions, ie by accident. This makes surrender by operation of law a dangerous thing.
When does an express surrender need to be preceded by agreement to surrender?
An agreement to surrender is not always required; it is only necessary where an immediate surrender is not appropriate, but the parties need to be committed to it without delay.
An agreement to surrender would normally cover such matters as: (i) the date, price and manner of the surrender; (ii) whether the surrender will occur with vacant possession; (iii) each party’s responsibilities in relation to the property pending completion of the surrender; (iv) the mechanics for handover of the premises on completion, such as delivery of keys/codes etc; (v) the status of obligations under the lease on its surrender and, in particular, whether a terminal dilapidations liability will remain.
The key legal fact to have in mind in relation to any agreement to surrender (apart from it having to be in writing) is that in relation to a protected business tenancy, the statutory notice procedure under section 38A(4) of the Landlord and Tenant Act 1954 must be followed first. Failure to do so will render the agreement to surrender void.
Accordingly, a landlord and tenant who want to enter into an agreement to surrender a business tenancy must either follow the “advance notice procedure”, where the landlord serves a warning notice 14 days or more before completion of the agreement to surrender and the tenant replies with a non-statutory declaration. Alternatively, where the warning notice is served less than 14 days before that completion, the tenant responds with the requisite statutory declaration.
This is particularly important to remember given that agreements to surrender can come in many forms: for example, offer-back clauses, under which a tenant is obliged to offer the landlord a surrender prior to any assignment of the lease, create agreements to surrender (Bocardo SA v S&M Hotels Ltd [1980] 1 WLR 17; [1979] 2 EGLR 48).
These rules, though, it must be stressed, apply only to agreements to surrender. They do not apply when the parties move straight to the deed, which does not therefore need to be preceded by the service of the requisite notices/statutory declaration.
What are the elements of an express surrender?
Express surrenders must be in writing by deed (Law of Property Act 1925 (“LPA 1925”) sections 52 and 53) drawn up by the landlord and the tenant. If there are joint landlords or joint tenants, all must be party: Leek and Moorlands Building Society v Clark [1952] 2 QB 788.
No particular words are necessary to effect a surrender by deed as long as it is clear from the wording that it is a surrender that the parties are seeking to effect. Usually the words “surrender and yield up” are used.
The deed must specify the surrender to be taking place upon its execution: any postponement will render it an agreement to surrender and thus, as regards business tenancies, fall into the category of having to be preceded by the statutory formalities.
What are the elements of a surrender by operation of law?
A surrender by operation of law (also known as an implied surrender – see QFS Scaffolding Ltd v Sable [2010] EWCA Civ 682) will involve an act or a collection of acts which singly or together show unequivocally that the landlord and tenant accept that the tenancy is at an end. This means either:
(i) The giving up of possession by the tenant and/or the landlord, itself or by or a third party, going into occupation: see Artworld Financial Corporation v Safaryan [2009] EWCA Civ 303; [2009] 2 EGLR 27. In that case a surrender by operation of law was held to have occurred when the landlord re-took possession and accepted back the keys even though the contemporaneous correspondence did not support the idea of there being an intention to surrender; or
(ii) The return of the keys – an important symbol of possession – to someone authorised to accept them. Handing back the keys, however, is rarely enough by itself. Even if the landlord accepts them, it must still be shown that he did so with the intention of determining the tenancy and not merely because he had no alternative or was a nitwit. The requirement that the conduct of the parties must be inconsistent with the continuation of the lease is therefore a high threshold; or
(iii) The landlord accepting rent from sub-tenants lawfully paying rent to the head landlord: see Gray v Balls (1861) 5 LT 395); or
(iv) The parties taking a step which is only consistent with the grant of a new (valid) lease (to the existing tenant or to someone else) or which can only sensibly be explained as a surrender of the lease and the grant of a new lease for a different term or of a different demise: see Friends Provident Life Office v British Railways Board [1996] 1 All ER 336; [1995] 2 EGLR 55, Gibbs Mew plc v Gemmell [1999] 1 EGLR 43). Any fresh demise will effect a surrender by operation of law of the previously existing tenancy, even if all that has occurred by way of fresh demise is the tenant giving up part of the demise and paying less rent for what remains.
What needs to happen for a surrender by operation of law to occur?
The key word is “unequivocal”: the landlord changing the locks or installing a caretaker just to secure the property; or the landlord taking back the keys just to facilitate viewings for a potential re-let or to carry out repairs, would not necessarily be unequivocal enough. Nor would an acceptance of keys by mistake or stated to be “without prejudice”: see Proudreed Ltd v Microgen Holdings plc [1996] 1 EGLR 89.
The basis of the doctrine of surrender by operation of law is estoppel. It arises from a deemed agreement between the landlord and tenant that the lease should be treated as having ended, together with a change of position by one of them in reliance upon that deemed agreement.
The deemed agreement must arise from an unequivocal act because the doctrine is based on the circumstances being such that it is inequitable for either party to dispute that such acceptance has occurred. There is therefore no surrender by operation of law by mere verbal agreement: there must, as well, be an act which is simply inconsistent with the lease continuing, carried out by one party and positively relied upon by the other.
What happens if a surrender by operation of law occurs by accident?
Because a surrender by operation of law depends on the parties having objectively manifested an intention no longer to be bound by the lease, it is nothing to do with their subjective intention. However, in principle, equity can set aside a surrender on grounds of mistake, undue influence, misrepresentation etc. In practice, though, the power amounts to this: the party seeking to set it aside must be innocent and it is all the easier to set it aside if the surrender is induced by fraud.
What is the difference between surrender by operation of law and abandonment of a tenancy?
Abandonment of the premises by the tenant without more (even if rent is unpaid) is not a surrender, because the landlord may still have manifested an objective intention for the tenant’s liability to continue: see Bellcourt Estates Ltd v Adesina [2005] EWCA Civ 208; [2005] 2 EGLR 33.
What happens to undertenants on a surrender?
Unlike the position on exercise of a break clause, the “branch” does not fall with the “tree”. A surrender of a lease does not in itself terminate the sub-lease; the head landlord becomes the landlord of the undertenant on the terms of the underlease: section 139 of the LPA 1925 (which is why, on an assignment, the landlord is legitimately concerned with the terms of any underlease). The mortgagee is protected in the same way. A surrender does not destroy the rights of the chargee over a leasehold interest.
Can a surrender occur at any time?
Yes, it can. Under Schedule 6 of the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, the previous requirement, that the tenant must have been in occupation under the tenancy for at least a month in order for any surrender to be valid, has been removed. A surrender can therefore take place a scintilla after the lease is entered into, though not at any time before: surrender of a future interest is not a surrender properly so called.
Seitler’s leading practitioners
Lisa Barge, Eversheds
Siobhan Cross, Pinsent Masons
Julie Gattegno, Nabarro
William Lawrence, WH Lawrence
Colin Richman, Teacher Stern
Pamela Shepherd, Browne Jacobson
Leading authorities
Friends Provident Life Office v British Railways Board [1996] 1 All ER 336; [1995] 2 EGLR 55
Proudreed Ltd v Microgen Holdings plc [1996] 1 EGLR 89
Artworld Financial Corporation v Safaryan [2009] EWCA Civ 303; [2009] 2 EGLR 27
Bellcourt Estates Ltd v Adesina [2005] EWCA Civ 208; [2005] 2 EGLR 33
QFS Scaffolding Ltd v Sable [2010] EWCA Civ 682
Useful resources
Woodfall: Landlord and Tenant 17.008-17.048 (Sweet & Maxwell)
Hill and Redman’s Law of Landlord and Tenant A42262-4367 (Butterworths)
