Surrendering leases by operation of law

Is the surrender by operation of law ?

If a tenant wishes to surrender its lease (i.e. give its interest back to the landlord)  it can do so either:

1. Expressly and by agreement so that the parties enter into a deed of surrender; or
2. By what is termed “operation of law”, where the acts of both parties to the lease are taken as evidence that the lease has come to an end.  The property in question must be handed back to the landlord and the landlord must accept the handing back.

In an express surrender, it will be clear that the surrender has happened however in a surrender by operation of law, the facts need to be considered carefully.

In the recent case of QFS Scaffolding Limited v Sable and another [2010] EWCA Civ 682 which involved a tenant who went into administrative receivership,  it was judged, on appeal, that the lease had not been surrendered by operation of law.

The basic facts of the case are as follows.  The Tenant, who held a lease (the Lease) of a building yard (the Premises), went into administrative receivership.  They then ceased trading from the Premises.

A company (QFS) who was interested in furthering one part of the Tenant`s business went into occupation of the Premises and started negotiations for a new lease paying a monthly rent direct to the Landlord for their occupation.

During this process, the Landlord, mistakenly, was of the view that the Lease to the Tenant had come to an end as they had moved out, stopped trading and had ceased to pay the rent.  Further the administrative receivers did not mention the Lease in the creditors report which was circulated to, amongst others,  the Landlord (the Landlord being one of the creditors for unpaid sums due under the Lease).

QFS solicitors then wrote to the Landlord stating that it was their belief that the Lease had not been surrendered and that QFS were going to take an assignment of the Lease from the administrative receivers on behalf of the Tenant.

The Landlord disagreed with this view, claiming that QFS simply had a tenancy at will and then sought to end the tenancy at will and regain possession of the Premises.

It was held that the Lease had been validly surrendered by operation of law and the County Court granted the Landlord an order for possession against QFS

QFS appealed against the decision and the Court set aside an order for possession.

It was held that, although the facts surrounding the Tenant`s original departure might lead the parties to believe that the surrender had taken place the view is that the Tenant had not acted in a way which unequivocally demonstrated that the Lease had ended. Namely:

• Ceasing to use the Property for its business;
• Vacating the Property;
• Not paying rent;
• Not acknowledging any liability for rent; and
• Not making any reference to the  Lease in the administrative receiver`s report

The Court did however make it clear that if the Landlord had at the time the Tenant moved out of the Premises granted a new lease to QFS then the old lease would have been surrendered by operation of law.  This is a firmly established principle in  case law that  if a tenant either consents to or requests that a landlord grant a new lease to a new tenant of premises where a lease is being surrendered then the old lease is deemed to have been surrendered immediately before the grant of the new lease.

It is important therefore when surrendering a lease by operation of law that you carefully consider the facts and take proper legal advice.  Best practice is to enter into a deed of surrender so that all parties are clear that the surrender has taken place.