Legal pitfalls to avoid when surrendering a lease

By James Khakpour-Smith

Partner

22 May 2023

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One lingering consequence of the pandemic is that many tenants are locked into commercial leases of properties that they no longer require. The need for physical retail outlets has been seriously impacted by the growth of online shopping as has the demand for office space as working from home remains a reality for many office workers, way after the cessation of the pandemic.

Although a Landlord cannot be forced into a surrender by a tenant it may well be in both parties’ best interests to negotiate an agreement to surrender the lease where a tenant is accruing arrears allowing the landlord the benefit of finding a more favourable tenant on more favourable terms or the opportunity to redevelop. Although the parties are open to agree and negotiate the terms of a surrender, a surrender generally works by effectively bringing the lease to an end,  releasing the tenant and landlord of any obligations and covenants under the lease from the date of surrender with the parties remaining liable for any breach of covenant prior to this date.

However there are several factors prior to surrender that must be considered to ensure that a surrender is granted successfully in accordance with the parties wishes.

Is there a Lender involved?

Where a lease is subject to a charge it is important to check that the landlord has the requisite authority to grant the surrender. In Co-operative Bank plc v Hayes Freehold limited (in liquidation) and others [2017] EWHC 1820 (Ch) the legal charge document in relation to the headlease required that consent was obtained from the lender prior to any surrender. This obligation was overlooked and the surrender was not successful. However the simultaneous surrender for the underlease was successful which left the tenant in the unfortunate position of being liable for the covenants under the headlease but with no income generated from an underlease.

A tenant’s obligations to reinstate and repair the property after the surrender

Unless provision to the contrary is provided, parties to the lease will only be liable for breach of covenants up to the date of surrender. In Baroque Investments Ltd v Heis & Ors [2012] EWHC 2886 (Ch) the tenant had covenanted to a licence for alterations which provided that the tenant reinstate the property before the end of the lease. It was construed by the court that this meant that the tenant had the whole of the lease term to do this. Effectively the tenant was not held liable for the reinstatement because the obligation on the tenant was released on the date of surrender.

Entering into an agreement to surrender

It is important for a landlord not to assume that something that may appear obvious will be a condition of the contract. In Dreams Ltd v Pavilion Property Trustees Ltd and another [2020] EWHC 1169 (Ch) the court decided when contemplating the terms of an agreement to surrender, that although it made commercial sense that any dilapidations payment should be made by the tenant in order to complete the surrender, that in the absence of express wording to this effect, that this was not the case. Reference to ‘monies due’ could not be stretched to include damages for breach of obligation.

Further, if a lease is granted inside of Part II of the Landlord and Tenant 1954 (the Act) with security of tenure, then upon entering into an agreement to surrender it is important to follow the mechanism of contracting out of the provisions of the Act for it to be effective. If it is not,  the tenant will still have the right to request and obtain a new lease as an agreement to surrender involves the tenant relinquishing their statutory rights to renew or be paid compensation.

Further factors for consideration are whether VAT will be payable on any premium with regards to the surrender or possible SDLT implications.

If you require any advice with regards to surrender, either from a landlord or tenant perspective, Taylor Walton have a designated commercial property department with experienced solicitors that will be able to help you. To make contact with one of the team please send us your details via our online form.

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Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.