Surrender games: to accept the keys or not?

Surrender by operation of law is a consensual transaction; the conduct of both landlord and tenant must unequivocally amount to an acceptance that the tenancy has ended.

In the recent case of Padwick Properties Ltd v Punj Lloyd Ltd [2016] EWHC 502 (Ch), the High Court held that the return of the keys, changing of the locks and marketing of the property by the Landlord did not amount to unequivocal conduct which was inconsistent with the continuation of the Lease.

What was the dispute about?

In 2005 Padwick Properties (the Landlord) acquired a long lease of a commercial property in Stockport. The property was subject to an underlease for a term of 21 years (the Lease).

The Lease was assigned to Simon Carves Limited (the Tenant) in 2006, with its parent company, Punj Lloyd Limited (the Guarantor), entering into a deed of guarantee with the Landlord. This included guaranteeing payment of all moneys due under the Lease and, should the Tenant cease to be liable, to enter into a new lease of the property.

In July 2011, the Tenant went into administration and its assets were sold to a subsidiary of the Guarantor. The subsidiary was granted a licence to occupy the property, which it did until 28 September 2011.

On 30 September 2011, the administrators of the Tenant informed the Landlord that the Tenant had vacated the property and that the security and safety of the property was now the responsibility of the Landlord. Shortly afterwards the keys were returned to the Landlord. The Landlord’s solicitors accepted the keys, but made it clear that the Landlord did not accept the surrender.

There were continuing concerns about the security of the property and, in late 2011, reports from the local police stated that the property was being used as a “hang out” for local youths. In accordance with the requirements of the Landlord’s insurer, security was installed and the locks were changed. The Landlord also took steps to market the property, advertising it as having “vacant possession”.

In February 2013, the Tenant was placed into creditor’s voluntary liquidation and the Lease was disclaimed. In late 2013, the Landlord gave notice to the Guarantor requiring it to take a new lease. The Guarantor responded, asserting that the Lease had been surrendered and there was, therefore, no continuing liability.

What did the court decide?

The court made it clear in its decision that the Landlord’s conduct, viewed in its totality, was consistent with the continuation of the Lease. There had been no unequivocal action by the Landlord that could amount to an acceptance that the tenancy had ended.

The return of the keys to the Landlord was not itself inconsistent with the continuation of the Lease. The Landlord had made it clear that the keys were being accepted for security reasons and not by way of surrender.

On the facts, the purpose of changing of the locks and implementing additional security was not to exclude the Tenant, but to ensure that the property was secure. The court held that in every case the question to be asked is: has the landlord gone beyond the protection of its interests, and demonstrated an intention to have possession, to the exclusion of the tenant?

The court confirmed that, had the property been re-let, the Lease would have been determined. However, simply marketing the property did not amount to conduct which was inconsistent with the continuation of the Lease, nor did it matter that it had been marketed with “vacant possession”. In the court’s view: “[the Landlord] was in a position to take possession whenever it chose to do so. In fact, it has not chosen to do so.”

What does this mean for landlords and tenants?

Landlords, tenants and their respective agents should be aware of the implications of this decision. For a landlord, although each case will be viewed in light of all of the facts, it will not necessarily be inconsistent with the continuation of the lease to:

• accept the keys back from a tenant, provided no acceptance of any surrender is given;
• carry out any acts which are consistent with the landlord’s rights under the lease – for example, entering the property to inspect or repair;
• perform any of the tenant’s covenants in the lease; or
• market the property, provided a further lease is not granted.

However, a landlord must ensure that it does not go further, and use the property for its own benefit. Any such conduct will be inconsistent with the continuation of the lease, and will give rise to a surrender by operation of law.

Tenants must be careful they do not just return the keys to their landlord and abandon the property in the hope that their liability will cease. There is a long-term risk that they, and any guarantor, will remain liable for any sums due arising under the lease. A tenant should seek that its landlord unequivocally accepts any surrender, or preferably enter into a deed of covenant.