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How to (or not to) surrender a lease by operation of law: Levett-Dunn v NHS Property Services

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Summary: It is not always clear whether or when a lease has been surrendered by operation of law. Actions, rather than words, matter, so it is crucial for both landlords and tenants to realise the implications of their conduct.

The surrender of a lease can occur either expressly or by operation of law. Where landlord and tenant have entered into a deed of surrender, the end of the lease should be unambiguous. However, it is not always certain whether or when a lease has been surrendered by operation of law.

The court recently considered this question in the case of Levett-Dunn v NHS Property Services Ltd. Actions, rather than words or intentions, matter in such circumstances, so it is crucial for landlords, property managers and tenants to realise the implications of their conduct. Whilst the case was decided on a different issue, the judgement contains useful guidance and clarification on this topic.

Overview

For a lease to be surrendered by operation of law, both landlord and tenant must unequivocally act in a way that is inconsistent with the continuation of the lease.

In this case, the tenant had attempted to terminate its leases by vacating the premises and returning the keys to the landlord (in addition to exercising the break options under the leases). The court stated that, by doing so, the tenant had made an implied offer to surrender the leases. The leases would have been surrendered if the landlord had then unequivocally accepted the return of the property, by reclaiming possession and using the premises for its own benefit “beyond the totally trivial”.

Practical examples

This is a high threshold. It is also not always clear whether or not a surrender will be inferred. Examples of conduct by a landlord which has not amounted to acceptance of a surrender include:

  • Accepting back keys without more – practically, one party has to hold the keys “to prevent an absurd situation in which they are passed back and forth”;
  • Exercising its rights under the lease (such as entering the premises to inspect or to repair them) – these are not inconsistent with the lease continuing;
  • Acting to protect or preserve the property (such as taking security measures, tidying or repairing) – these preserve its interest in the value of its property, and are a reasonable response to the tenant's intention not to perform these obligations;
  • Marketing the premises for re-letting – the landlord must be entitled to seek to mitigate its loss by trying to find another tenant, even if the existing lease technically subsists.

In this case, the landlord had clearly accepted the keys without prejudice to the continuing of the lease. It had also taken steps to market the premises for re-letting, and agreed “subject to contract” heads of terms with a new tenant. These and various other acts had been done for justified reasons, and did not amount to an acceptance of the surrender.

However, the landlord had then leased the premises to a new tenant. The court’s view was that this lease could not have been granted if the old tenant’s leases were still subsisting. It was therefore an unequivocal act of acceptance and recognition that they were not, and that the landlord was retaking possession. The landlord’s solicitor had also represented to the new tenant that the old leases had ended.

The court found this was so, although the landlord had maintained in correspondence and negotiations with the old tenant that their leases subsisted. The takeaway is that whether a lease has been surrendered is an objective question: the parties’ expressed position and intentions are irrelevant.

Impact for tenants

Ideally, you should try to agree a surrender of a lease with your landlord. Not only would you know with certainty whether the lease has been effectively surrendered, but you would also have the chance to mitigate any liability for rent by allowing the landlord to re-let the property.

Given the uncertainty of attempting to surrender a lease by operation of law, this should be a tactic of last resort. If, however, you are already in this position, it would be helpful to be able to show that the landlord has reclaimed possession and granted a lease of the premises to a new tenant.

Impact for landlords

Where a tenant has vacated the property, returned the keys and expressed an intention to end its lease, beware of responding in a way which suggests you are accepting the return of the property (unless, of course, you wish to accept the surrender). As a precaution, the acceptance of keys should be expressly stated to be without prejudice to the lease subsisting.

A surrender by operation of law will have the same effect as an express surrender of a lease. Consequently, you may wish to consider potential issues such as:

  • the effect of the surrender on sub-leases;
  • when the surrender occurs and the impact on rent payments and apportionments;
  • any SDLT arising on the landlord’s “acquisition” of the tenant’s leasehold estate.

If you are concerned about this issue and would like to learn more, please get in touch at Grace.Tan@blplaw.com or Elizabeth.Thompson@blplaw.com.

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