A surrender by operation of law is well established at common law but its application still causes landlord and tenants headaches.
A surrender by operation of law will take place when the both the landlord’s and tenant’s conduct is unequivocally inconsistent with the continuation of the lease. It is not enough to simply return the keys to the landlord, the landlord must also demonstrate its intention to take back possession of the premises.
In Padwick Properties Ltd v Punj Lloyd Ltd  EWHC 502 (Ch) these principles were applied.
Padwick Properties Ltd (Padwick) bought an intermediate leasehold interest in Sim-Chem House, Stockport, in 2005. The property was subject to an underlease granted in 2000 for a term of 21 years. A subsidiary of Punj Lloyd Ltd (Punj) acquired the underlease in 2006. Punj entered into a deed of guarantee with Padwick, guaranteeing payment of all money due under the lease and if the lease was later disclaimed Punj would accept a new lease on the same terms.
In July 2011 Punj placed it’s subsidiary that held the lease into administration. The solicitors acting for the administrators wrote to Padwick informing them that the property had been vacated and that “the security and safety of the property will revert to your client”. The administrators later physically returned the keys to Padwick under cover of a letter which offered a surrender of the lease. Padwick took steps to secure the property and for a brief period in 2012 put the property on the market offering vacant possession. In 2013, the subsidiary went into liquidation and the liquidators disclaimed the lease.
In December 2013, Padwick wrote to Punj requiring them to enter into a new lease pursuant to the deed of guarantee and demanded payment of the rent due. Punj claimed that the lease had been surrendered by operation of law and as such the guaranteed liabilities did not survive that surrender.
The court held that the lease had not be surrendered by operation of law and Punj was liable to make payment of the monies owed and enter into a new lease.
In particular the court said the lease was not surrendered when:
- The property was vacated – there had been no unequivocal conduct by Padwick inconsistent with the continuation of the lease.
- When the keys were delivered – accepting the keys without more would always be equivocal. Besides that, Padwick made it clear that it only took the keys to secure the property.
- When additional security measures were added to the property – Padwick had done no more than try to protect its property from damage, which was also in Punj’s interests and that of its subsidiary.
- When marketing the property – merely attempting to let did not give rise to an estoppel and it made no difference that the property had been advertised with vacant possession.
This case highlights the risks for all parties when faced with a potential surrender by operation of law and the need for unequivocal conduct on the part of both parties. A tenant cannot terminate a lease by simply walking away from the premises.
For the full case report please click here www.bailii.org/ew/cases/EWHC/Ch/2016/502.html