Surrendering a commercial lease – could your tenants just hand back the keys?
12 January 2017
Times of economic uncertainty can leave commercial landlords vulnerable, especially where a struggling tenant wants to escape lease obligations. If there is a formal insolvency, you may have a chance to negotiate but what if the tenant just moves out and hands back the keys?
If tenants want to get out of their lease obligations, they can either look for someone to whom the lease can be transferred or try to negotiate a surrender with the landlord.
Surrender of the lease
A lease is surrendered when the tenant’s interest is transferred back to the landlord and both parties accept that it will be extinguished. This can be done formally, by deed, but this is not always necessary. If the landlord and tenant agree that the lease will be surrendered and they act in a way that is inconsistent with the lease continuing, the lease will be surrendered ‘by operation of law’. Surrendering without a formal deed is quicker and cheaper but it can create uncertainty about what both sides intended.
The key requirement is for some unequivocal act that shows both the landlord and tenant accept that the lease is at an end, such as the tenant vacating the property and the landlord going into occupation instead, or the landlord granting a new lease of the same premises to a third party at the request of the original tenant.
This can happen deliberately if the landlord accepts that the original lease has been surrendered and grants a new lease to someone else. It can also happen by accident, if they both agree to vary the lease to extend the premises or the term. This will be treated as a surrender by operation of law whether the parties intend it or not.
What if the Tenant moves out?
Can the tenant simply move out and return the keys? The short answer is no. It must be clear from the landlord’s conduct that the tenant’s act of giving up the property is accepted as a surrender.
If a struggling tenant hands back the keys, the landlord should take legal advice quickly. The courts have been reluctant to find that a landlord has accepted a surrender by accident but there are problems that can be avoided with the right tactical advice. The landlord should make it clear immediately that the lease is not surrendered, even though the landlord now holds the keys. It is particularly important to seek advice about rent demands and any offers by the tenant to make part-payment of arrears because this complex area can have far-reaching implications.
Protecting your property
Can a landlord act to protect the property if the tenant moves out? Recently, in the case of Padwick Properties Ltd v Punj Lloyds Ltd , the Court ruled on a dispute over whether a lease had been surrendered by operation of law when the tenant moved out and returned the keys. The landlord changed some of the locks, installed extra security to prevent trespassers and started marketing the property. The tenant’s guarantor, trying to escape liability for arrears of rent, claimed that the landlord’s actions showed a clear acceptance that the lease had been surrendered. The court disagreed. The Court held that it was perfectly reasonable for the landlord to carry out marketing and to make sure the premises were secure, and these actions did not mean the landlord had accepted a surrender.
Conduct of the landlord and tenant where a surrender by operation of law has been inferred include:
- the landlord granting a tenancy at will to the existing tenant;
- the tenant vacating the property and the landlord going into beneficial occupation of the property;
- allowing another to reside at the property for several weeks and carrying out redecoration;
- the landlord letting the property to a third party at the request of the (original) tenant; and
- the head landlord accepting rent from undertenants who have been directed by the tenant to pay rent to the head landlord.
Conduct where a surrender has not been inferred include:
- the landlord accepting the keys by mistake or without prejudice;
- the tenant abandoning part of the property;
- the landlord changing the locks of the property to secure it against intruders while maintaining a claim for rent against the tenant;
- the landlord allowing a third party to occupy the property while negotiating the terms of a new lease that was not completed (the landlord unsuccessfully argued that the occupier had occupied the property as a tenant at will during the lease negotiations, which brought about a surrender of the lease by operation of law);
- the landlord failing to demand rent and service charge, when it knew that the tenant no longer wanted the lease; and
- occupation by a third party following the administration of the tenant.
Accepting the surrender
If the landlord decides to accept a surrender, the tenant will be released from liability for paying rent and performing lease covenants in the future. The tenant will still be liable for rent already due and any other existing breaches. The landlord may be able to pursue the tenant’s guarantor for unpaid rent and other breaches but this is a complex area where the landlord will need expert legal advice. A final word of caution is that landlords should do due diligence before taking a surrender, in order to avoid unexpected liabilities. For example, any underlease created by the tenant will remain in place, so the landlord will not get vacant possession and will be liable for any landlord obligations in the underlease.
No landlord wants to be left with an empty property or a failing tenant whom you are pursuing for unpaid rent. But as long as you get the right tactical advice, taking back control of the property may be the best way out.
For further advice on commercial leases or any other landlord and tenant problems, contact Richard Morgan in our commercial property department on 01782 525013 or email him at firstname.lastname@example.org .
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.