Padwick Properties Limited v Punj Lloyd Limited  EWHC 502 (Ch) is a reminder that conduct of both the landlord and tenant are relevant to effect surrender by operation of law and that the return of keys and vacating the premises alone is not sufficient.
In 2005, Padwick Properties Limited ("Padwick") acquired a long lease of a property subject to an underlease. In 2006 the lease was assigned to Simon Carves Limited ("SCL") subject to a guarantee from its holding company Punj Lloyd Limited ("Punj"). Under the terms of this guarantee Punj agreed to pay all monies due under the lease and to take a new lease of the property if the lease was disclaimed.
In 2011 SCL went into administration and ceased trading. Its assets were purchased by another subsidiary of Punj, Simon Carves Engineering Limited ("SCEL"). SCEL was granted a licence to occupy the property and remained in occupation until 28 September 2011. Two days later, SCL's administrators gave notice to Padwick that it had vacated the property and that the security obligations under the lease had therefore reverted back to Padwick. In November 2011, SCL's administrators returned the keys to the property to Padwick who however made it clear that it did not accept the unilateral surrender. In 2012, Padwick took steps to secure the property by changing some of the locks and, at the request of their insurers, ensuring 24 hour security. For a short while, Padwick also remarketed the property with vacant possession. In 2013, SCL went into liquidation following which Padwick gave notice to Punj that pursuant to the guarantee it was required to enter into a new lease and pay the outstanding rent due. Punj refused arguing that the lease had been surrendered.
The Court rejected Punj's surrender argument and ordered it to pay the rent arrears (of approximately GBP 4 million) and take up a new lease as per the terms of the guarantee. When considering whether surrender by operation of law had taken place, the Judge confirmed that the conduct of both parties must be inconsistent with the continuation of the lease:
- SCEL's occupation of the property did not indicate that the lease had been surrendered as this was on the basis of a licence to SCEL while SCL remained the tenant. SCEL paid the licence fee to SCL's administrators who then sent the money to Padwick on SCL's behalf. The Judge commented that "the tenant cannot effect a surrender simply by vacating the premises".
- The locks were not changed for the purpose of excluding SCL or of enabling Padwick to enter into the property for its own beneficial use, instead the Judge found that Padwick's actions were to protect both its own interests and those of SCL and Punj.
- It was clear from Padwick's actions that acceptance of the keys was consistent with a concern for the security of the property and did not indicate an intention to take possession of the property. Further, the keys were delivered to Padwick's solicitors who did not have authority to make a disposition of a property interest on Padwick's behalf.
- The Judge found that marketing the property did not demonstrate surrender as this was not the same as actually re-letting it; he also commented that it made no difference that the property was advertised with vacant possession.
This is a stark reminder to tenants that handing over the keys and vacating the premises will simply not be sufficient for a lease to be brought to an end and the tenant or indeed its guarantor being released from its obligations under the lease and that a lease will only be surrendered if there is an unequivocal agreement by the landlord to that effect.
Conversely, landlords must be careful of the risk of innocently accepting surrender by operation of law and should, when handed over keys, reserve their position and consider, if a guarantor is available, enforcing the terms of the guarantee.
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