Section 100(1) of the Law of Property Act 1925 allows mortgagors in possession to accept the surrender of a lease in order to grant another that satisfies the requirements laid down in section 100(5). The new lease must be for a term that is not less than the unexpired term of the lease that it is replacing. In addition, it must reserve a rent that is not less than the rent reserved by the lease that is to be surrendered, and must take effect in possession within one month of the date of the surrender. However, lenders often exclude a borrower’s statutory power to grant and accept surrenders of leases.
Co-Operative Bank plc v Hayes Freehold Ltd (in liquidation) [2016] EWHC 2068 (Ch) reminds us that failure to obtain a lender’s consent to the surrender of a lease, when required, could, potentially, prove disastrous.
The case concerned the validity and the effect of a composite deed of surrender of commercial premises. Several parties were involved because there was a headlease and an underlease. The tenants had purported to surrender both leases in return for unconditional and irrevocable releases from liability in favour of both themselves and the undertenant’s guarantor.
The freeholder’s lender drew attention to its charge, which provided that the bank’s consent was required before any dealing with or surrender of the headlease. It complained that it had not consented to the transaction and claimed that the deed of surrender was, therefore, void as against the bank.
During interim proceedings between the parties, the intermediate landlord/tenant claimed that, if the surrender of the headlease was ineffective, then the undertenant and its guarantor also remained liable on the underlease. If the surrender of the headlease was invalid, then – so the argument ran – the surrender of the underlease and the release of the guarantor were, as a result, ineffective as well.
Was the surrender of the underlease and/or the release of the undertenant’s guarantor subject to an implied condition precedent that the surrender of the headlease was also valid? The guarantor tried to persuade the judge that its release from liability was expressed to be “unconditional and irrevocable” – and that an implied term cannot contradict the express terms of a contract. But the judge decided that, although an implied term cannot contradict an express term of the contact, one can have an express or implied condition precedent that prevents the whole contract coming into effect.
The failure of the implied condition precedent meant that the surrender of the underlease, and the “unconditional” release of the guarantor, were also ineffective. It was commercially inconceivable that the intermediate landlord/tenant had intended to release the undertenant and its guarantor even if it continued to remain liable under the headlease itself. Furthermore, the release of the guarantor was not a separate, stand-alone deal and the intermediate landlord/tenant had intended to release the guarantor only if it was going to be released from its own rental obligations as well.
Allyson Colby, property law consultant
