When surrendering doesn’t signal the end

A surrender is a mutually agreed way to ‘hand back’ a lease to the landlord and bring parties’ obligations under it to an end (usually). However, a recent High Court case[1] highlighted one of the situations where the purported surrender can be ineffective – in this case meaning that one party was left to fulfil lease obligations that it thought had been terminated.

Background

A freehold owner of the property had granted a lease to a tenant, who in turn had sub-leased to a sub-tenant with the benefit of a guarantor for the sub-tenant’s obligations. A group company of the sub-tenant purchased the freehold with funding from a bank in exchange for a charge over the freehold.

It was then the intention that both the lease and the sub-lease would be surrendered, the obligations under them extinguished and the guarantor released.  A deed of surrender was completed which was designed to achieve this.

Purported surrender

The High Court ruled that the sub-lease was successfully surrendered and that it was not conditional on a successful surrender of the head lease, and therefore the sub-tenant and its guarantor were both released from any future liabilities under the sub-lease.

Unfortunately for the head tenant however, the new freeholder had not obtained the bank’s consent to the surrender of the head lease in accordance with the terms of the charge. As a result, the head lease surrender was ineffective.

The High Court held that it could not imply into a deed of surrender a condition that a landlord had obtained its mortgagee’s consent.  Also the sub-lease surrender was not dependent on the head lease surrender.

Therefore, the head tenant was left with on-going liabilities to pay rent to the landlord under the head lease and it no longer had the benefit of rent from a sub-tenant and its guarantor.

How to surrender effectively

The interpretation of the law was nothing new, and the High Court held that the wording of the unconditional release of the guarantor in the deed was unambiguous. If the parties intended the release to be conditional on the effective surrender of the head lease, they should have made this clear in the deed.

A tenant’s solicitor should check the landlord’s title for evidence of a charge, specifically enquire if the mortgagee’s consent is required and ensure it is obtained before completion of the surrender.
 

[1] Co-operative Bank Plc v Hayes Freehold Ltd (in Liquidation) [2017]