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How not to accidentally surrender a lease

12 May 2015

A useful update for landlords and tenants

This article looks at how leases can be bought to an end before the term end date by one of two methods – by entering into a Deed of Surrender or by Surrender by Operation of Law.

A Deed of Surrender

A Deed of Surrender will set out in writing the terms agreed by the parties and will usually include details of any payments to be made in respect of dilapidations at the property and also any unpaid rent. Obviously both parties to the lease need to enter into the Deed and so it cannot be done unilaterally.

Surrender by Operation of Law

A surrender by operation of law is often said to ‘just happen’. Therein lays the danger. A surrender by operation of law is an unequivocal act by one party to the lease (normally the tenant) demonstrating their intention to terminate the lease followed by acceptance of that act and its consequences by the other party. Crucially though, whilst an unequivocal act and acceptance are necessary, intention to surrender is not. It is entirely possible to accidentally surrender a lease.

Most commonly a surrender by operation of law (whether intentional or not) happens either where the tenant hands back all keys to the premises to the landlord who accepts them, or where the landlord accepts and/or demands rent from a party who is not the tenant. Accepting that the tenant is no longer liable to pay the rent will essentially mean accepting that the tenant’s lease has been surrendered.

Varying the lease can also take effect as a surrender of the original lease and a re-grant of a lease on identical terms save for the variation. This is where the parties are most likely to be unaware that their actions will constitute a surrender. An increase in the demise or to the length of term will act as a surrender and re-grant. So, a tenant taking a lease of additional space will act as a surrender and re-grant, as will extending the lease term. Changes to the rent alone however will not constitute a surrender.

Common traps

The most common traps for a landlord to fall into (and for the tenant to be aware of if they want to affect a surrender) are as follows:

  • Where the tenant advises the landlord that it wants to end its lease and as a result sends all keys to the premises to the landlord. In order to prevent a surrender, the landlord needs to either send the keys back to the tenant or hold them to the tenant’s order on the basis that the lease continues. In addition the landlord will need to treat the lease as ongoing, holding the keys on file alone will be contrary to this and should be avoided. Rent demands should still be issued and the landlord cannot advertise the premises as being available for rental whilst the lease term continues.
  • Where a tenant contacts the landlord and says that they have a need for additional space usually connected to the current premises, and want the lease to be varied accordingly. Such a variation will be an increase in the demise. Assuming all other things remain the same, it is most likely that there will be an immediate ‘re-grant’ of the lease so that the lease is re-granted to the tenant on identical terms save for the demise. There may be Stamp Duty Land Tax (SDLT) consequences however as it may be treated as a new lease for SDLT purposes. A substitution of one suite of rooms for another will also take effect as a surrender and re-grant. A reduction in the demise will not usually be a surrender, but if the rent is also decreased then a surrender and re-grant may take effect.

As can be seen, it is easy to accidentally surrender a lease and in particular to surrender a lease and re-grant a further lease. The effects can be wide ranging and could leave a landlord with a vacant unit, or a tenant it did not know it had. Equally a tenant may have uncertainty of terms and a possible SDLT charge.

There is however a wealth of case law in the area and it is likely that the circumstances you find yourself in will have been tested before a Court already. You should consider taking legal advice if any terms of your lease change in any way to ensure your rights are fully protected.

If you require any further advice please contact a member of our Real Estate Litigation team