What is a surrender?
A lease can be ended by surrender and there are two types. The first is express surrender where the landlord and tenant agree to end the tenancy. This is often documented and money changes hands. The second is by operation of law. One of the ways in which a lease can be ended by operation of law is where the tenant gives up possession of the property and the landlord accepts this.
What happened in the Artworld case?
Artworld Financial Corporation owned a west London property which it let to the Safaryan family on a 3 year lease in September 2004 at a rent of £390,000 per annum. 15 months before the lease was due to expire the tenants purported to end the lease by handing back the keys to the landlord with rent payments totalling £487,500 still outstanding. The tenant argued that the landlord had accepted the situation so that the lease was at an end and no further rent was due as a result of an implied surrender by operation of law.
Although it was clear in correspondence between the parties that the landlord was not treating the lease as at an end it was considered relevant that the landlord:
- accepted the keys back from the tenant;
- obtained a check out report and inventory;
- redecorated parts of the property to suit the landlord’s own occupation; and
- allowed family members of the shareholders of the landlord to occupy the property for their own benefit.
What did the Court decide?
The Court’s decision was that actions spoke louder than words. Although the landlord had contested the surrender in writing it had acted as though the tenant no longer had a right to be there. The threshold was a high one but the acts stated above were enough to show that the landlord had gone significantly beyond actions consistent with the continued lease of the property by the tenant.
What impact does the ruling have on landlords managing an investment portfolio?
The Artworld case is a cautionary tale for those managing real estate investment portfolios. Each case will turn on its individual facts but the following points should be noted:
- Make sure junior estate managers know of the risks and when to escalate any tenant activity.
- Consider implementing a process to deal with tenants who take unilateral action e.g. handing back keys.
- Take advice early and don’t make any unequivocal acts until you are sure of your position.
- Balance mitigating your loss against not agreeing to a surrender. Actions consistent with the landlord’s rights in the lease or basic actions taken to preserve the property are unlikely to prejudice your position.
Sara Mounsey is a solicitor in Langleys’ Real Estate Unit.
© Langleys Solicitors, 2009. This article applies to England and Wales only. Published for general information purposes only and not intended as legal advice.