When is a Commercial Lease Surrendered?

In one guideline case, the High Court has ruled that neither returning the keys, nor changing the locks, nor putting a property on the market effects a surrender. The decision had the effect of leaving a tenant holding a lease it did not want and a £4 million bill in respect of rent arrears.

The long leaseholder of the office block granted a 21-year sub-lease of the premises to another company. The lease was guaranteed by the latter’s parent company. The tenant company later ceased trading and its administrators wrote to the landlord’s solicitors announcing that the premises were vacant.

The keys were returned to the solicitors and, after the tenant company entered liquidation, the liquidators disclaimed the lease. The landlord subsequently called on the parent company’s guarantee and required it to pay rent arrears and to enter into a new lease. The latter refused on the basis that the lease had been surrendered. Pending resolution of the dispute, the property had lain empty for more than four years.

Ruling in favour of the landlord, the Court found that it had accepted the returned keys and changed the locks in order to secure the vacant premises. Its attempt to market the property was also no more than any reasonable landlord would be expected to do in the circumstances. None of those actions amounted to an unequivocal acceptance that the lease had been surrendered.

In those circumstances, the Court found that the lease on which a rent of almost £890,000 per annum was payable remained extant. The tenant’s parent company was ordered to enter into a new lease, in accordance with its guarantee, and to pay accrued rent arrears, which came to over £4 million.

It is important to ensure that the correct procedures are followed in order to terminate a lease. Failing to do so or to negotiate the termination with the landlord can prove expensive, as in this case.

(Padwick Properties Ltd v Punj Lloyd Ltd)