Surrendering a commercial lease – could your tenants just hand back the keys?
Times of economic uncertainty can leave commercial landlords vulnerable, especially where a struggling tenant wants to escape lease obligations. If there is a formal insolvency, you may have a chance to negotiate but what if the tenant just moves out and hands back the keys?
Emma Baker, Solicitor and Commercial Property Law specialist at Malcolm C Foy & Co Solicitors in Doncaster and Rotherham explains the options for landlords when a tenant wants to surrender a commercial lease.
If tenants want to get out of their lease obligations, they can either look for someone to whom the lease can be transferred or try to negotiate a surrender with the landlord.
Surrender of the lease
A lease is surrendered when the tenant’s interest is transferred back to the landlord and both parties accept that it will be extinguished. This can be done formally, by deed, but this is not always necessary. If the landlord and tenant agree that the lease will be surrendered and they act in a way that is inconsistent with the lease continuing, the lease will be surrendered ‘by operation of law’.
Surrendering without a formal deed is quicker and cheaper but it can create uncertainty about what both sides intended.
The key requirement is for some ‘unequivocal’ act that shows both the landlord and tenant accept that the lease is at an end, such as the tenant vacating the property and the landlord going into occupation instead or the landlord granting a new lease of the same premises.
This can happen deliberately if the landlord accepts that the original lease has been surrendered and grants a new lease to someone else. It can also happen by accident, if they both agree to vary the lease to extend the premises or the term. This will be treated as a surrender by operation of law whether the parties intend it or not.
Tenant moves out
Can the tenant simply move out and return the keys? The short answer is no. It must be clear from the landlord’s conduct that the tenant’s act of giving up the property is accepted as a surrender.
If a struggling tenant hands back the keys, the landlord should take legal advice quickly. The courts have been reluctant to find that a landlord has accepted a surrender by accident but there are problems that can be avoided with the right tactical advice. The landlord should make it clear immediately that the lease is not surrendered, even though the landlord now holds the keys. It is particularly important to seek advice about rent demands and any offers by the tenant to make part-payment of arrears because this complex area can have far-reaching implications.
Protecting your property
Can a landlord act to protect the property if the tenant moves out? Earlier this year, in Padwick Properties Ltd v Punj Lloyds Ltd , the court ruled on a dispute over whether a lease had been surrendered by operation of law when the tenant moved out and returned the keys. The landlord changed some of the locks, installed extra security to prevent trespassers and started marketing the property. The tenant’s guarantor, trying to escape liability for arrears of rent, claimed that the landlord’s actions showed a clear acceptance that the lease had been surrendered. The court disagreed. It was perfectly reasonable for the landlord to carry out marketing and to make sure the premises were secure and these actions did not mean the landlord accepted a surrender.
Accepting the surrender
If the landlord decides to accept a surrender, the tenant will be released from liability for paying rent and performing lease covenants in the future. The tenant will still be liable for rent already due and any other existing breaches. The landlord may be able to pursue the tenant’s guarantor for unpaid rent and other breaches but this is another complex area where the landlord will need expert legal advice. A final word of caution is that landlords should do due diligence before taking a surrender, in order to avoid unexpected liabilities. For example, any underlease created by the tenant will remain in place, so the landlord will not get vacant possession and will be liable for landlord obligations in the underlease.
No landlord wants to be left with an empty property or a failing tenant whom you are pursuing for unpaid rent. As long as the landlord receives the right tactical advice, taking back control of the property may be the best way out.
For further advice on commercial leases or any other landlord and tenant legal problems, contact Emma Baker, Solicitor and Commercial Property Law specialist at Malcolm C Foy & Co Solicitors in Doncaster and Rotherham.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances. 28.11.16