Consider this scenario: A tenant in liquidation has returned the keys to the landlord and the landlord’s secured the property and marketed it to rent. In these circumstances, you might think the tenant’s guarantor no longer needs to be concerned about the guarantee, as the lease has been surrendered. But you could be wrong! Here’s what you need to know…
Surrendering a commercial lease by operation of law
In a recent case, a landlord was awarded £4 million against the guarantee of a lease, and the guarantor was ordered to take up a new lease following their obligations under the guarantee.
Surrendering a lease may be done one of two ways:
Expressly surrendering it by deed
Surrendering it by operation of law
What is surrender by operation of law?
This is a method of surrender where the conduct of the landlord and tenant amounts to an acknowledgment by both parties that the tenancy has ended.
Following the case of Padwick Properties Limited V Punj Lloyd Ltd  EWHC 502 (Ch), it’s clear there must be some act that demonstrates the landlord’s intention to regain possession of the property, in addition to simply returning the keys to the premises.
In Padwick Properties Limited v Punj Lloyd Ltd, the Court considered whether it was possible for the surrender of a lease by operation of law to take place, when only one party releases itself of its obligations.
The case facts
Padwick Properties Limited were the landlords of a property, which was subject to an under lease. A subsidiary of Punj Lloyd Ltd acquired the under lease and entered into a Deed of Guarantee with the landlord, guaranteeing payment of all money under the lease. If the lease was later disclaimed, Punj Lloyd Ltd would enter a new lease on the same terms.
In 2011, the subsidiary company went into administration. The administrators wrote to the landlords’ solicitors stating: “The security and safety of the property will revert to your client”. The administrators later returned the keys to the landlord with a covering letter surrendering the lease.
The landlord responded, stating they accepted the keys for maintaining security to the property. Following this, the landlord boarded up the property, changed the locks and marketed it for a short period to-let with vacant possession.
The subsidiary company later went into liquidation and disclaimed the lease. In December 2013, the landlord wrote to Punj Lloyd Ltd requiring them to enter into a new lease pursuant to the deed of guarantee, and demanded payment of the rent due. Punj Lloyd Ltd claimed the lease had been surrendered by operation of law, and as such they were no longer liable under the guarantee.
Punj Lloyd Ltd argued the landlord had accepted the keys, boarded up the property and marketed it. They stated the landlord, by their conduct, had accepted the surrender.
The Court held that the conduct of both parties is required for a surrender by operation of law to occur, and found in favour of the landlord.
In this case, the High Court gave judgment for £4 million against the guarantor of the lease. He also made an order for specific performance for them to take up a new lease pursuant to their obligations under the guarantee.
Key Points to consider
This case highlights the risks for both parties when faced with a surrender of a lease by operation of law. It’s important that both parties acknowledge the surrender of the lease. In short…
- A tenant can’t terminate a lease by simply walking away from the property and returning the keys
- The facts of each case will be considered. In this case, even the act of boarding up the property and accepting the keys was not deemed to be inconsistent with the continuation of the lease
- Landlords should take care when accepting the return of keys. In this case, the landlords’ agent was careful to expressly state that the return of keys was only accepted to protect the landlord’s interest
- Parties should keep a paper trail of their intentions. The letter from the landlords’ agent was a key factor in deciding the case.
If you’d like further information about surrendering a commercial lease by operation of law or would like to arrange an appointment to see one of our Solicitors, please contact us on 01604 828 282.