It has been suggested that the number of store closures and empty units is at a low, however, high profile administration announcements show that they are still a reality and landlords, tenants and guarantors should all be mindful of common law surrender principles as there are risks for each of them.
A landlord should be concerned with an inadvertent surrender whereas tenants and guarantors should be wary of long term liabilities accruing if they do not establish a successful surrender.
Surrender By Operation of Law
It is well established in common law that a surrender by operation of law occurs when the unequivocal conduct of parties to a Lease is inconsistent with its continuation, however, earlier this year the High Court considered whether one party unilaterally divesting itself of its obligations under a lease amounted to a surrender by operation of law.
- Padwick Properties Limited v Punj Lloyd Limited  EWHC 502 (Ch) concerned a property in Stockport let at an annual rent of £784,268.
- Padwick Properties Limited (“Padwick”) were the intermediate Landlord of the property which was underlet to Simon Carves Limited (“SCL”) whose ultimate parent company was Punj Lloyd Limited (“Punj”).
- When SCL took an assignment of the underlease, Punj entered in a Deed of Guarantee with Padwick guaranteeing SCL’s performance of their Lease obligations.
- SCL was placed into administration in July 2011. They stopped trading and the majority of their assets were sold to a group company at which point the group company was granted a Licence to Occupy the property and remained in occupation until 28 September 2011.
- On 30 September 2011 SCL’s administrators informed Padwick’s Solicitors that SCL had vacated the property and that the “security and safety” of the property would revert to Padwick. They keys were returned to Padwick some weeks later and accepted on the basis that they had been informed that they would otherwise be thrown away.
- Padwick made arrangements for the property to be secured soon after it had been vacated and, at the insistence of their insurers, security arrangements were put in place. The property was also briefly put on the market in 2012 but remained vacant.
- On 19 December 2013, Padwick gave notice to Punj pursuant to the Deed of Guarantee requiring them to enter into a new underlease and demanding payments of the monies due. Punj challenged this on the basis that the lease had been surrendered by operation of law and they therefore had no continuing liability under the guarantee.
The High Court reminded the parties that surrender by operation of law is “a consensual transaction, constituted by conduct that is unequivocal on both sides and that renders it inequitable thereafter for either party to dispute that the tenancy has ended” and, by taking a realistic view of the situation, decided that Padwick’s actions did not amount to unequivocal acceptance that the lease was at an end.
As a result, Pubj were ordered to pay over £4,000,000
The High Court’s views of the various actions taken by the landlord were as follows:
- The interim occupation of the group company reflected the continuation of SCL’s interest in the Lease. Particular attention was drawn to the Licence fee which was properly received by Padwick from SCL’s administrators.
- The receipt and acceptance of the keys did not in itself amount to inconsistency with continuation of the Lease as Padwick had informed SCL’s administrators that acceptance was for security and not surrender. The reality is that one party has to hold the keys to prevent them passing back and forth.
- The additional security arrangements were considered nothing more than Padwick simply protecting their interests.
- Marketing the property was deemed to be a reasonable course of action in the circumstances as it would have been for the benefit of everybody if Padwick had been able to find a new tenant.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.