There have been several instances lately where surrender of a lease by operation of law has been unsuccessful.  A misunderstanding of what makes such a method of surrender effective has been detrimental to the landlord's position.  The Court of Appeal recently set out its interpretation of the legal principle of surrender by operation of law as applied to the circumstances in the case of QFS Scaffolding Limited v Sable and another [2010] EWCA Civ 682.  When the case was first heard, the judge had ruled, in favour of the landlords, that the lease had been surrendered by operation of law.  However, the tenants appealed and the Court of Appeal held that the criteria as to whether or not a lease had been surrendered by operation of law had not been met in the circumstances.

Surrender

For a surrender of lease to be effective, the tenant must relinquish its lease to its immediate landlord and the landlord must accept that.  The combination of these acts extinguishes the lease.  There are two methods of effecting a surrender: expressly, by way of deed, and by operation of law.  The preferred route is expressly by a deed of surrender, as the parties' acquiescence is clear and unequivocal.  If the expressed surrender is not by a deed (a written document which is clearly referred to as a deed and complies with the relevant formality of execution which is more than a simple signature and is delivered) the surrender will be void in accordance with the stipulation in section 52 of the Law Property Act 1925 that "All conveyances of law and any interest therein are void for the purpose of conveying or creating a legal estate unless made by deed."  If the surrender takes place within the realms of a business tenancy to which the Landlord and Tenant Act applies, the statutory procedures set out in section 38 A(4) of the Part II of that Act must be adhered to for the surrender to be valid.  When surrender occurs as a result of operation of law, the surrender is constituted either by the subsequent actions of the parties constituting an acknowledgement of the tenancy being at an end, or by those actions being inconsistent with the continuance of the lease.
 
Differing perceptions

Mr and Mrs Sable were the landlords in a lease of a builder's yard for a term of 21 years to the London Demolition Company Limited (LDC).  LDC used the builder's yard for two businesses: a demolition business and a scaffolding business.  LDC were in financial difficulties in 2005 and just prior to the appointment of joint administrative receivers on 26 January 2006, had formed two other companies, one of which, QFS Scaffolding Limited (QFS) was set up to take over the scaffolding business of LDC.  During 2006, QFS were in negotiations with the landlords to take a new lease of the premises.  QFS were in possession of the premises at the time of the negotiations and the landlords, acting on the basis that the lease had been surrendered by operation of law, regarded QFS's occupation as a tenancy at will. 

The new lease negotiations did not result in a positive outcome between the parties and so the landlords sought to determine the tenancy at will and regain possession of the property.  Meanwhile, however, QFS had obtained an assignment of the lease to LDC, from the remaining administrative receiver of LDC, and considered that it was therefore the new tenant under the existing lease.  At the County Court in the landlords' action for recovery of possession, the judge, having decided in favour of the landlords, concluded that the original lease had been surrendered by operation of law and made an order for possession. 

The link between estoppel and surrender by operation of law

QFS appealed the decision.  The Court of Appeal considered how previous judicial decisions had interpreted the legal principles for surrender by operation of law.  The cases reaffirmed the link with the principle of estoppel.  The general principle of estoppel means that a party is prevented from denying or contradicting something previously asserted, in circumstances where that party has led another party to accept a position.  The matter does not rely on the intention of the parties, rather it arises by virtue of some act.  The Court of Appeal referred to the legal textbook authority (set out in Woodfall's Law of Landlord and Tenant looseleaf edition Vol 1, paragraphs 17.018 to 17.032) that both parties agreed applied in the circumstances.  Quoting from this, the Court referred to the fact that "there is no estoppel by mere verbal agreement; there must in addition be some act which is inconsistent with the continuance of the tenancy;".

In this case, the landlords' arguments were not intended to rely on the general principles of estoppel, which meant that the Court did not have to concern itself with questions as to "reliance, or detriment, or change of position, or unconscionability, or whether the effect of the estoppel is temporary or permanent".  The landlords were, instead, relying on the particular type of estoppel involved in the principles relating to surrender by operation of law.  The Court made the observation that the principles of estoppel, as they relate to surrender by operation of law, seem to have evolved along their own path.  By this the Court meant that in circumstances where both the landlord and the tenant subsequently act on the basis that a tenancy has ended, that tenancy will be treated as having ended.  Accordingly, the consequence of the acts of the parties must be such as to render continuation of the lease impossible; the behaviour of the parties must "unequivocally amount to an acceptance that the tenancy has ended". 

Actions must be unequivocal

The Court of Appeal analysed the conduct of the various parties.  The added complication of looking at the conduct of the various parties was a fact that LDC was in administrative receivership.  Prior to the appointment of the receivers, LDC had formed two other companies to carry on different aspects of their business and QFS were in occupation of part of the premises prior to the appointment of the receivers, albeit this was without any consent on the part of Mr and Mrs Sable.  The important party, for the purposes of surrender, was LDC.  In particular, the Court looked at the conduct of LDC acting by its administrative receivers to ascertain whether or not its conduct was unequivocally inconsistent with the continuation of the original lease, or whether that lease was still in existence. 

It was noted that LDC had stopped using the property, had accepted QFS in occupation of the property, made no offer to pay the rent and did not acknowledge any liability for rent.  At the time of their appointment, the receivers informed the various creditors of LDC of their position and of their duty to realise the assets of LDC in order to pay the proceeds in discharge of secured debt.  Mr and Mrs Sable were among the creditors advised of this by the receivers and the Sables were asked to advise of any debt owed to them by LDC.  In this correspondence the receivers had commented that LDC was continuing to trade at that time and no mention was made of QFS, nor did the administrative receivers refer to the lease in any way.  Mr Sable gave the receivers copies of the lease, the rent deposit agreement and a schedule of rent arrears.  He also referred to LDC's breaches of the terms of the lease and there was some talk of recovery of the property.  At that time, the intention of the receivers was for the lease to be transferred and arrears to be paid.  Mr Sable, however, soon discovered that it was QFS and not LDC that were occupying and trading from the premises and he brought this to the attention of the receivers.  In subsequent discussions between Mr Sable and QFS, Mr Sable had expressed his opinion (albeit in error) that the lease was at an end due to the appointment of the receiver, but he expressed a willingness to negotiate with QFS to enter into a new lease of the property.  What was then agreed between Mr Sable and QFS was a monthly rental payment payable during the negotiation stage for a new lease. 

Just before agreement on the final points of the new proposed lease with QFS, the receivers of LDC confirmed to QFS's solicitors that they would assign the lease to QFS.  This information was passed to Mr and Mrs Sable who had already issued a notice to determine the "tenancy at will" that they believed QFS were operating under pending the agreement of a new lease.  Mr and Mrs Sable brought the court action on the basis that the lease had been impliedly surrendered and so they would be entitled therefore to have issued the notice to determine the tenancy at will under which QFS had been operating on a temporary basis.

QFS argued that the lease was still in existence and that they had taken an assignment of that lease.  Mr and Mrs Sable argued that the fact that the administrative receivers knew of the existence of the lease but made no reference in the receivers' report, supported their own view that the original lease was at an end.  They believed LDC (acting by their receivers) assented to the tenancy at will to QFS.

High threshold set for unequivocal conduct

The Court of Appeal took the view that the parties were considering the facts the wrong way round.  Instead of assuming the existence of a tenancy at will, and then attempting to establish whether or not there had been a surrender of the original lease, the first question must be whether or not the lease has been surrendered by operation of law, given that it was not terminated by a deed.  There was much discussion on the issue of an unequivocal act to ascertain whether or not surrender by the tenant had taken place by operation of law.  The Court restated the principle from Bellcourt Estates Limited v Adesina [2005] 2 EGLR 33 that there should be a "high threshold" when ascertaining whether or not the conduct of the parties is inconsistent with the continuation of the lease. 

In this case, it was apparent that LDC had not positively carried out any act to surrender the Lease that could be described as unequivocal.  Even through their administrative receivers, there was nothing done to actively surrender the lease, and their behaviour would, at best, lead to ambiguity.  The Court of Appeal decided that there had not been any surrender by operation of law and, accordingly, LDC were still the party who were entitled to possession.  The subsequent assignment by the receivers of LDC to QFS was, therefore, from a valid and subsisting lease.  The Court of Appeal did not involve itself as to the matter of the consent of the landlords to that assignment.

The Court of Appeal observed that the judge at first instance had not elaborated on what led him to the conclusion that a tenancy at will existed.  It is fair to say that the conduct of LDC, having stopped its use of the property and not offering to pay any rent etc, at a time when it knew that the landlords were negotiating a new lease of the property with QFS, points in the direction of a party who no longer regarded the lease as being in existence.  However, the Court of Appeal did not consider this to be sufficient to constitute an unequivocal action from which to conclude that the lease had ended.  The conduct must be beyond any doubt or alternative interpretation, and the landlord needs to be clear about this, before accepting the return of the property. 

Another recent case that highlights the risks to landlords is Area Estates v Weir [2010] EWCE Civ 801, in which a seller took the view that a reference to a lease on the title sheet for his property was of no consequence in a sale, as the lease had been determined by operation of law.  The tenant had vacated the premises and the landlord seller who accepted the surrender of the lease acknowledged this.  Generally, actions of both parties could amount to a surrender by operation of law.  However, the tenant in that case had previously had a petition of bankruptcy lodged against it, and so was not in a position to surrender the lease without the consent of the Court.  Although, subsequent to the completion date, the consent of the Court was obtained, the lease was still in existence at the time of completion of the sale, entitling the purchaser to rescind the contract and demand the return of its deposit.  There was always a high likelihood that a court would grant the consent.  There was equally a possibility that the trustee in bankruptcy could take the view that the lease was still in existence at the time of completion. It was not open to the Court to take a view that the lease entry on the title could not be regarded as only a conveyancing problem, insignificant enough to prevent rescission of contract. 

The strict approach shown by the Court of Appeal in the case QFS Scaffolding Limited v Sable and another in applying a "high threshold" is to be favoured.  In the interests of certainty, the conduct being assessed must be clear and unambiguous, to avoid the situation where contracts can be undone either because behaviour is misconstrued, or through lack of adherence to other legal formalities.

QFS Scaffolding Limited v Sable and another demonstrates the lesson that the only sure way to confirm the position for the landlord, who may be seeking possession of his property, is to formally and expressly enter into a deed of surrender with the tenant.  Area Estates v Weir also reminds us that it is essential to carry out all necessary searches and be fully satisfied on the title position. 

Conclusion

Without having a clear understanding of the legal position, Mrs and Mrs Sable found themselves in the position of having a tenant who, by virtue of an assignment from the receiver, is in occupation of the property without landlord's consent.  Mr and Mrs Sable may yet raise the issue that the assignment was granted without their consent, in breach of the alienation provisions of the lease, but this was not argued by them in the present case.  The tenant, QFS, did make a request of the Court to the effect that the assignment was valid and properly vested in QFS, however the Court did not grant this.  The Court simply stated that this matter of whether the assignment is in breach of the lease covenants has not been determined in relation to the declaration that the lease is vested in QFS. 

To read the decision in QFS Scaffolding Limited v Sable and another click here.

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