Terminating commercial leases: Service and surrender

28th July 2016

Terminating commercial leases can be a highly contentious business. Rare are the cases in which the interests of the landlord and tenant align such that it is not inconvenient for one party when the other wishes to bring the lease to an end.  For example, in a falling market landlords generally prefer to keep tenants on the hook, so that they do not get left with the liability of a vacant property and the costs and inconvenience associated with attempting to re-let; and in a rising market tenants often resist early termination out of a desire to retain existing rents.  So, very often when a landlord or a tenant seeks to terminate a commercial lease, tactics and traps abound as each party vies for the outcome that best serves its interests.

The recent case of Levett-Dunn & Ors v NHS Property Services Ltd [1] confirmed some key principles of which all commercial landlords and tenants should be aware in relation to two different means of terminating leases: the service of break notices and surrender by operation of law.  Real Estate Litigator David Manda explains the case and offers some practical advice.

Lease termination – facts

The tenant occupied three floors of a building pursuant to leases which defined “the Landlord” as four individuals, all of one address at 75 Tyburn Road, Birmingham. The ‘service of notices’ clauses in the leases incorporated section 196 of the Law of Property Act 1925 (LPA), which provides that notices shall be sufficiently served if they are left at or delivered by registered post to the last known place of abode or business [of the Landlord]; and they stated that “service on any one of the parties comprising the Landlord shall be deemed to be service on all” [2]. The tenant sent four separate notices, one addressed to each of the individuals named as the Landlord, by registered post to 75 Tyburn Road, purporting to exercise the break option in the leases. The Landlord’s managing agent then accepted the keys to the premises, albeit on a without prejudice basis; referred in correspondence to the Landlord becoming responsible for utilities at the premises; and marketed with a view to re-letting.  The property was then re-let some time later.

Lease termination – issues in dispute

The Landlord argued, however, that the notices were ineffective, because 75 Tyburn Road was not, in fact, the “place of abode or business” of any of the individuals comprising the Landlord.

The questions for the High Court to determine were:

• Had a break notice been served validly; and
• In any event, had the leases come to an end by surrender by operation of law?

Service of break notice

Whilst there are exceptions to every rule, received wisdom is generally that a strict approach to interpretation and implementation will be adopted in the exercise of lease breaks. In the leading authority on defective notices [3], Lord Hoffman explained this principle, saying “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease”.  Myriad break cases have recognised that the terms of the break clause and service of notice provision – like any contractual provision – are paramount and will be strictly construed.  This strict approach has led to the practice of parties who are seeking to serve break notices going to extensive investigations as to the identity and whereabouts of the intended recipients, as well as carrying out meticulous checks as to, and compliance with, any other procedural requirements or break conditions.  However the High Court in this case arguably adopted a more practical approach.

Finding, for the tenant, that the break notices had been validly served, the court held that the principal purpose of a service of notices clause is to provide a practicable method by which a party wishing to serve a notice can be reasonably sure how it should do so.  As such, it decided that, having signed up to the service of notices clause in the leases and having provided an address, it was up to the Landlord to inform the tenant if that address was not, or was no longer, “a place of abode or business” for the purposes of that clause.  The Landlord had failed to inform the tenant of any change of address for service, and so the risk lay with it.

The court also specified that it was irrelevant for the purposes of section 196 LPA whether or not the Landlord actually lived or carried on business at the premises; and it went so far as to reject the submission that the given address could not be used since it was not the “last known” address, because the defendant had not exercised reasonable diligence to determine whether at was still a business address of any of the individuals comprising the Landlords.

Surrender by operation of law

In addition, the High Court went on to consider whether or not there had been a surrender of the leases by operation of law. It reiterated that the law imposes a high threshold and that, for a lease to be surrendered by operation of law, both the landlord and the tenant must unequivocally act in a way that is inconsistent with the continuance of the lease.  Here, the tenant’s action in serving a break notice, vacating the premises and returning the keys comprised an unequivocal offer to surrender; but did the landlord unequivocally accept that offer, and if so, at what point?

The court held that the Landlord’s agent’s acceptance of keys was not an unequivocal acceptance of a surrender at law. The keys had been accepted on a without prejudice basis and, practically speaking, someone had to take responsibility for securing and protecting the premises.  In exactly the same vein, and in light of the clear basis on which the keys had already been accepted, neither was the managing agent’s correspondence referring to liability for utilities an acceptance of a surrender at law.

The court also held that it was not an acceptance of a surrender for the Landlord to market the premises for re-letting. Marketing could be ceased at any time and the Landlord could rely throughout on its contention that the leases were continuing.  Marketing was therefore merely an example of the Landlord attempting to mitigate its loss.

However, the High Court concluded that the fact of re-letting the premises to a third party was an unequivocal acceptance of a surrender by operation at law. Therefore, regardless of validity of the break notices, the leases would have come to an end at the point the new leases were completed.

Practical advice

The Levett –Dunn v NHS case gives rise to the following practical advice.

• If a party gives an address for service in a lease and incorporates section 196 LPA, the onus is on that party to notify the other if and when that address is not the acceptable place of abode or business for the purposes of service of notices.
• This is a particularly important decision for landlords and their managing agents to note. It will now be more crucial than ever for tenants to be kept fully informed as to the correct identity of their landlord and of landlords’ addresses for service.
• To protect themselves even further in the event of a change in the ownership of the reversionary interest, tenants may wish to consider expressly incorporating into their leases provisions which state that unless and until a tenant has received a notice of a change in landlord and the name and address of any new landlord, service of a notice by the tenant on the prior/existing landlord will be deemed served on the actual/new landlord.
• It may still be prudent, however, and it may serve the time and cost of dealing with a dispute, if the party serving a notice does still carry out comprehensive checks, including Land Registry searches, as to the identity and whereabouts of the recipient.
• If a party vacates premises and delivers up the keys, great care should be taken as to the basis on which those keys are accepted.
• Whilst acceptance of keys in itself and/or on a without prejudice basis may not constitute acceptance of a surrender by operation of law, all the circumstances of a case will be relevant and the risk of inadvertent surrender may remain.
• Similarly, whilst acting to secure or protect an abandoned property will not, without more, constitute surrender at law, it is the wider circumstances of the case as a whole that will determine whether/when the lease comes to an end.
• It is clear from this case that if the process of marketing for re-letting is properly managed, that will not result in inadvertent surrender. If and when any new lease is actually completed, however, the existing/prior lease (and any subleases or other associated interests and liabilities) will, in all likelihood, come to an end.

Whether you are a landlord, tenant or agent, and whether you are contemplating bringing your lease to an end or you are faced with any termination action taken by the other party, please do not hesitate to contact David Manda or any member of Walker Morris’ Real Estate Litigation team for advice.

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[1] [2016] EWHC 943 (Ch)
[2] Ibid para. 7
[3] which is possible when a defect on the face of a contractual notice is so minor that the reasonable recipient can nevertheless be in no doubt as to the notice’s meaning – see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749