Ending Leases Options and issues

Helen Close

Hilary Boothroyd

28 April 2010

About the speakers

Helen Close is a partner in the Dispute Resolution team, specialising in real estate dispute resolution and landlord and tenant disputes. She deals with complex and high value disputes encompassing rent review issues, opposed lease renewals and breach of covenant claims. . Email: helen.close@bsdr.com Telephone: 01235 836608

Hilary Boothroyd is an assistant in the Real Estate team. She is experienced in all aspects of commercial property including landlord and tenant matters, site assembly, development work and secured lending transactions. Email: hilary.boothroyd@bsdr.com Telephone: 01235 836641

Disclaimer

The information and commentary on the law given during this seminar and contained in these notes is provided free of charge for information purposes only.

All reasonable efforts are made to ensure that any information and commentary are accurate and up-to-date, but no responsibility for accuracy or for any consequence of relying on it is assumed by BrookStreet des Roches LLP or any member or employee thereof.

The information and commentary does not and is not intended to amount to legal advice to any person in relation to any specific case. Any attendee at the seminar or other user of these notes is advised to obtain specific, personal legal advice about any specific case and not to rely on the information or comments in these materials. No responsibility is accepted for any loss arising from inaccurate or incomplete information, however caused.

Contents

1. Introduction ................................................................................................................................. 1 2. 1954 Act protected tenancies .................................................................................................... 1

2.1 What protection does the Act give? .................................................................................... 1 2.1.1 Which tenancies does the Act apply to? 1 2.1.2 If protection is automatic, how do you terminate? 2

2.2 Termination of the lease (without renewal) ......................................................................... 2 2.2.1 Termination initiated by the tenant (s27) 2 2.2.2 Termination initiated by the landlord (s25) 3 2.2.3 Renewal initiated by the tenant (s26) 3 2.2.4 Opposition by the landlord – statutory grounds 4 2.2.5 Compensation 4

3. Expiry ........................................................................................................................................... 5 3.1 End of fixed term ................................................................................................................. 5 3.2 When the tenant vacates - requirements for delivery of possession .................................. 5

3.2.1 Implied position 5 3.2.2 Express term 5

3.3 When the tenant stays - consequences of remaining in occupation .................................. 6 3.3.1 On what basis? 6 3.3.2 Tenant at will / periodic tenant / licensee 6 3.3.3 Liability for mesne profits and other losses 7 3.3.4 Action for double value (after landlord's notice) 8 3.3.5 Action for double rent (after tenant's notice) 8

4. Recovery of possession ............................................................................................................. 9 4.1 Recovery of possession at the end of the term .................................................................. 9

4.1.1 Possession proceedings in court 9 4.1.2 Changing the locks 9

4.2 Recovery of possession during the term for breach of covenant – forfeiture ..................... 9 4.2.1 Forfeiture for non payment of rent 9 4.2.2 Forfeiture for other breaches of covenant 10 4.2.3 Waiver 11 4.2.4 The “act” of forfeiture - court proceedings or peaceable re-entry? 11 4.2.5 Relief from forfeiture 13

5. Break .......................................................................................................................................... 13 5.1 Nature of break clause ...................................................................................................... 13 5.2 Who may exercise the break? .......................................................................................... 13 5.3 When the break may be exercised ................................................................................... 14

5.3.1 Fixed / rolling dates 14 5.3.2 Serving the notice 14 5.3.3 Problems with service 15

5.4 Break conditions ............................................................................................................... 15 5.4.1 Types of break condition 15 5.4.2 Relevant time for compliance 15 5.4.3 Examples of break conditions 15 5.4.4 Waiving compliance with conditions 17

5.5 Practical issues for the tenant ........................................................................................... 17

5.5.1 Before service of the notice 17 5.5.2 Service of the notice 18 5.5.3 Compliance with conditions 18

6. Surrender ................................................................................................................................... 18 6.1 What does surrender mean? ............................................................................................ 18 6.2 Types of surrender ............................................................................................................ 18

6.2.1 Express surrender 18 6.2.2 Surrender by operation of law 18 6.2.3 Surrender and re-grant 19

6.3 Surrenders of part ............................................................................................................. 19 6.4 Effect of surrender ............................................................................................................ 20

6.4.1 Between landlord and tenant 20 6.4.2 Effect on guarantors 20 6.4.3 Effect on sub-tenants 20 6.4.4 Stamp duty land tax 20

6.5 Practical issues for the parties .......................................................................................... 20 6.5.1 Landlord 20 6.5.2 Tenant 21

7. Terminal dilapidations and reinstatement .............................................................................. 21 7.1 Disrepair ............................................................................................................................ 21 7.2 Pre-action Dilapidation Protocol ........................................................................................ 22 7.3 Claim not settled ............................................................................................................... 22 7.4 Reinstatement ................................................................................................................... 22

8. Conclusion ................................................................................................................................. 22 Annex: Forfeiture in an insolvency situation ................................................................................... 24

-1-

1. Introduction

There are a number of different ways in which a lease can come to an end. The appropriate method of termination depends on a number of factors including whether or not the lease has the protection of the Landlord and Tenant Act 1954, which party wants to bring the lease to an end, whether the lease is coming to a natural end or either the landlord or the tenant wants to get out of it early and whether or not the tenant is in breach of any of the lease terms.

During this seminar we will look at some of the key considerations when a lease is being brought to an end in each of the following situations:

• The lease is a 1954 Act protected business tenancy and the tenant will not be renewing the lease at expiry (either because he wants to go or because the landlord wants him to go).

• The lease is not protected and the tenant will not be taking a new lease at expiry (including the position if the tenant remains in occupation and how the landlord can recover possession).

• The tenant fails to comply with the lease terms and the landlord wishes to bring the lease to early end (forfeiture).

• Either the landlord or the tenant has a break clause written into the lease which he wishes to exercise in order to bring the lease to an early end.

• The tenant wants to surrender the lease (or the landlord wants to take a surrender) in order to bring the lease to an early end.

We will also look briefly at terminal dilapidations and reinstatement requirements which may be relevant regardless of the way in which the lease is terminated.

Each of these topics could be a whole seminar in its own right, so the purpose of this seminar is simply to provide you with an understanding of the principal ways in which a lease may come to an end and to give an overview of the key issues.

2. 1954 Act protected tenancies

Part II of the Landlord and Tenant Act 1954 (the “Act”) offers statutory protection to business tenants.

It is possible for the landlord and tenant to agree that this protection will not apply to a particular lease by following the specified “contracting out” procedures.

2.1 What protection does the Act give?

There are two parts to the protection offered by the Act:

• At the end of the fixed term, a protected tenancy will not come to an end. Instead, it will automatically continue on the same terms until it is terminated in accordance with the Act. This is known as a “continuation tenancy”.

• When the tenancy is terminated in accordance with the Act, the tenant has a right to a new tenancy at a market rent (a “renewal lease”). The landlord can object to this but only on one of a number of specified grounds, and he has to prove these grounds.

2.1.1 Which tenancies does the Act apply to?

The Act applies to “any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him for those or other purposes”.

This sounds quite straightforward but has a number of elements to it:

a) What is a “tenancy”?

A “tenancy” includes a lease (including a periodic tenancy), an agreement for lease and an underlease (even an unauthorised one). It does not include a licence; however, there is a fine line between what amounts to a lease and what is merely a licence, so a landlord should not rely on this distinction!

-2-

There are a number of types of tenancy which are specifically excluded, the most significant being tenancies at will, agricultural, farm and mining leases, and fixed term tenancies of six months or less (provided there is no right to renew beyond six months and the tenant has not already been in occupation for more than 12 months).

b) What is a “business” purpose?

“Business” is widely defined to include a “trade, profession or employment”. It includes “any activity carried on by a body of persons, whether corporate or unincorporate”. This catches not only traditional business uses but also many recreational uses, such as sporting clubs and youth groups.

Where the premises are mixed use they will have the protection of the act if the business activity is a significant purpose of the occupation (so a property consisting of a flat over a shop is likely to be caught while a house with one room used as an occasional home office will almost certainly not be).

A business use in breach of a lease covenant will count where the lease permits some other business use. However, where the lease prohibits all business use the tenant will not gain protection unless the landlord has consented to, or acquiesced in, the breach.

c) What is occupation?

Occupation “by the tenant” need not be by the tenant personally.

2.1.2 If protection is automatic, how do you terminate?

Whilst the continuation of the tenancy at the end of the fixed term is automatic, termination is possible provided you follow specific procedures and can, in the landlord’s case, make out certain grounds to terminate. There are specified forms which have to be used and time limits which must be complied with. If these procedures are not followed correctly there are significant consequences - the tenant may lose his right to renew or the landlord may lose his right to terminate.

2.2 Termination of the lease (without renewal)

Termination of the lease may be initiated by either party. Note that the protection of the Act exists for the benefit of the tenant: a tenant can object to a landlord’s refusal to grant a renewal lease and can require that a new lease is granted unless the landlord proves certain grounds. However, the landlord cannot object to a tenant’s decision to terminate the lease and cannot require that the tenant takes a new lease if he does not want one.

2.2.1 Termination initiated by the tenant (s27)

a) Tenant does not want the lease to continue beyond the original fixed term

If a tenant does not want the lease to continue beyond the contractual termination date, he has two options:

• He can simply vacate by the contractual expiry date of the original lease. The original lease will come to an end and the tenant will not have any further liability in respect of it.

• Alternatively he can serve a section 27(1) notice on the landlord at least three months’ notice, expiring at lease end, that he is intending to vacate. If the tenant serves a section 27(1) notice but then remains in occupation the tenancy will come to an end and the tenant will become a trespasser. There is no prescribed form for this notice, though it must be in writing.

The use of either of these options is possible even if the landlord has already served a section 25 notice giving a termination date which is later than the contractual termination date. However, note that in these circumstances the tenant has no obligation to tell the landlord that he intends to vacate – he is not required to serve a section 27(1) notice. If a landlord wishes to prompt a

-3-

recalcitrant tenant into telling him whether he plans to stay, his only option is to serve a section 25 notice and issue proceedings.

b) Tenant wants to terminate a lease once it is continuing (s27(2))

If a tenant wishes to vacate once he is holding over following the expiry of the contractual term, he must serve a section 27(2) notice on the landlord (no prescribed form, though it must be in writing). This notice must give at least three months’ notice of termination.

Note that the old rules which required the notice to expire on a quarter day no longer apply. The notice can end on any day and there are statutory rules for apportioning any rent which has been paid in advance.

Where a section 25 notice has been served by the landlord and the tenant wishes to vacate earlier than the specified termination date, he is still able to serve a s27 notice, bringing the tenancy to an end at an earlier date (though not at a later date).

2.2.2 Termination initiated by the landlord (s25)

If the landlord wishes to terminate the tenancy he must serve a section 25 notice (in the prescribed form) on the tenant. As there are different section 25 notices for use in different situations it is important that the correct one is used.

The section 25 notice must comply with the following requirements:

• It must state the date upon which the landlord wants the existing lease to end. This date cannot be any earlier than the contractual expiry date of the lease. For a periodic tenancy, this is the date on which the landlord would have been able to terminate by notice if the tenancy were not protected. Where the lease contains a break clause and the landlord wants to break the lease, he can specify the break date.

• It must be served not more than 12 months nor less than 6 months before the termination date given in the notice.

• It must specify which of the grounds for termination the landlord is relying on. He cannot later amend these grounds so careful consideration must be given to them, particularly bearing in mind the tenant’s right to compensation where the lease if terminated only on “no-fault” grounds.

• It must be given by, or on behalf of, the landlord. If there are joint landlords then all of their names must be given.

The tenant is not required to give any kind of a response to this notice. He may be willing to give up possession, but the landlord will not know this until he moves out on the specified termination date. If the tenant does not want to give up possession he will need to make an application to the court, but he has until the specified termination date to make this application.

Due to this lack of certainty a landlord may decide to make an application to the court for termination of the lease. We will look at the court application in more detail later.

2.2.3 Renewal initiated by the tenant (s26)

Where the tenant wishes to request a new tenancy he must serve a section 26 notice (in the prescribed form and complying with the strict time limits) on the landlord.

If the landlord is happy to grant a new tenancy he does not need to do anything to terminate the lease and the renewal process will follow.

However, if he opposes renewal on one of the statutory grounds he must serve a counter notice within two months of the section 26 notice. This counter notice must specify which of the grounds for termination the landlord is relying on (see below). There is no prescribed form for the counter notice, but it must be in writing, and the exact wording must be used for the relevant grounds for termination.

-4-

If no notice has been received at the end of the two month period the landlord cannot oppose the grant of a new lease. However, the terms remain open to negotiation

If a notice opposing the grant of a new tenancy is served on the tenant and the tenant is not willing to give up occupation he can make an application to the court for the grant of a new lease and the court will be asked to decide if the landlord can terminate the lease.

2.2.4 Opposition by the landlord – statutory grounds

To recap, if a landlord wishes to retake possession of the property following the expiry of the lease term, he can either serve a counter notice to a tenant’s section 26 notice or he can serve a section 25 notice opposing renewal.

However, the landlord is only able to oppose renewal on one of the following statutory grounds:

(a) The Tenant has failed to maintain or repair the premises – the landlord will have to show that the tenant was under an obligation to maintain or repair and that he is in breach of this obligation. The landlord is only likely to succeed on this ground if the breach is serious and unremedied.

(b) The Tenant has persistently delayed in paying rent – the tenant must have fallen into arrears on several occasions, but the arrears need not have been substantial or long lasting and there need not be any arrears at the date of the hearing.

(c) There are substantial breaches of the obligations under the tenancy or objections to the manner in which the Tenant uses or manages the holding – this will require some substantial reason.

(d) The Landlord can offer alternative accommodation – this must be offered on reasonable terms having regard to the current tenancy and must be suitable to the tenant’s requirements.

(e) There are complex sub tenancies and the landlord can obtain a better rental return if the premises were let/sold as part of a larger unit – this ground is rarely used as it is very difficult to satisfy the requirements.

(f) The Landlord has an intention to demolish or reconstruct the premises on the termination of the current tenancy or intends to carry out substantial work of construction on the holding and could not reasonably do so without obtaining possession – this is the most frequently used ground. The Landlord must show that it has a genuine intention and reasonable prospect of carrying out the work; evidence of this may include preparation and approval of plans, a successful application for planning permission and evidence of the necessary financial ability.

(g) The Landlord intends to occupy the building for his own business – this is another frequently used ground. It is important to be aware of the five year rule: the landlord can only rely on this ground if his interest was purchased or created at least five years before the date specified in the section 25 or 26 notice.

Grounds (a), (b), (c) and (e) are discretionary; the court will consider all of the circumstances and decide whether it is reasonable to refuse to grant a new lease to the tenant on the grounds specified.

By contrast, grounds (d), (f) and (g) are mandatory and if the Landlord can prove the requisite conditions and intentions for the particular ground the court must order the termination of the tenancy.

2.2.5 Compensation

If the landlord relies solely on the “no-fault” grounds ((e), (f) or (g)) then statutory compensation may be payable to the tenant. Compensation is fixed at one times rateable value unless it can show that the tenant’s business had been carried on at

-5-

the premises for at least 14 years preceding the termination of the tenancy, in which case the tenant is entitled to two times rateable value.

Compensation is only available on quitting the premises and only where:

• the landlord’s notice specifies only one or more of these grounds and the tenant either:

o does not apply to the court, or does so but withdraws his application; or

o applies to the court but his application is refused because the landlord is able to establish one or more of these grounds.

• the landlord’s notice specifies one or more of these grounds together with other grounds, the tenant applies for a new tenancy and his application is refused based solely on one of these grounds.

3. Expiry

3.1 End of fixed term

A lease which is granted for a fixed term and does not have statutory protection under the Landlord and Tenant Act 1954 expires when the term comes to an end. It does so automatically and without notice and at the end of the term the tenant must give up possession of the demised property.

3.2 When the tenant vacates - requirements for delivery of possession

3.2.1 Implied position

a) Tenants

If a lease does not contain a yield up clause, it is implied by law that the tenant must deliver possession to the landlord at the end of the contractual term, together with anything that has become part of the demised property during the term.

b) Sub-tenants

This implied obligation also includes procuring that any sub-tenant gives up possession. If the premises are still occupied by a sub-tenant on expiry, the landlord may refuse to accept the possession and hold the original tenant liable.

Where only part of the property is sub-let, similar principles apply. If a landlord is effectively kept out of possession of the whole because part of it remains in the possession of a sub-tenant, the landlord may recover damages equal to the lost rental value of the whole property.

c) Exceptions

The general rule that the tenant must deliver up possession to the landlord at the end of the contractual term is subject to exceptions. These are the main examples:

i) The tenant generally has the right to remove tenant's fixtures, and consequently cannot be required to give up possession of them.

ii) As above, the tenant may be entitled to protection of statute, e.g. under the Landlord and Tenant Act 1954.

3.2.2 Express term

a) Tenants

Most written leases do not rely on the implied position. Instead they will contain an express obligation on the tenant to yield up possession at the expiry or earlier ending of the term in compliance with the covenants in the lease. The principal relevant clauses this must be read in conjunction with are the repair, decoration, alterations and signage clauses which Helen will cover later on.

-6-

The obligation to yield up possession will generally specify that the tenant must give up vacant possession rather than just giving up occupation. In this case the lease will usually provide that, if the tenant has left items at the property after expiry, the landlord may remove, store and dispose of them at the tenant's cost. The landlord may then sue under this clause to recover these costs.

For failure to give vacant possession on expiry, the sum recoverable from the tenant is likely to be modest in comparison to the same breach where the lease has ended due to the expiry of a break notice where delivery of vacant possession was a condition of the break. For this reason, I will deal with vacant possession in more detail in the context of break clauses.

b) Sub-tenants

Where the premises are still occupied by a sub-tenant on expiry, the tenant will be liable in damages for breach, even if the sub-tenant wrongfully refused to vacate.

The tenant will be liable for the period of the sub-tenant’s occupation after expiry, together with any costs incurred by the landlord in suing the sub-tenant to recover possession.

If it wishes, the landlord may let the tenant off the hook by accepting the sub-tenant as its direct tenant.

If the sub-tenant has a protected tenancy entitling it to stay in possession even after the tenant's lease has ended, the tenant will not have to pay compensation for use and occupation relating to any period after the end of its own tenancy as long as it has done everything it can to give possession to the landlord.

3.3 When the tenant stays - consequences of remaining in occupation

3.3.1 On what basis?

Where a lease has expired and the former tenant continues to occupy then the basis of occupation depends on the circumstances and conduct of the parties. It could be a tenant (at will or periodic) or a licensee. Alternatively it may be liable for mesne profits, double value or double rent (as to which see below).

3.3.2 Tenant at will / periodic tenant / licensee

In order to be a tenant (at will or periodic) or a licensee the landlord/licensor must have consented in some way to the occupation.

a) Written terms in place

The clearest way of indicating the basis of occupation is by putting in place a written document - a new lease (which could be periodic or fixed term, excluded or protected), a tenancy at will or a licence.

Care is needed if putting in place a licence because unless the former tenant’s occupation is genuinely changing into a licensee’s occupation then it may in fact still be a tenant. If the occupier is a tenant and is using the premises for business purposes then this may result in that tenant acquiring a protected periodic tenancy by default.

b) No written terms in place

If there is no documentation in place at expiry but the landlord consents (or acquiesces) to the continued occupation then the basis of occupation will be implied. The former tenant could be an implied tenant at will, an implied licensee or an implied periodic tenant. The applicable basis of occupation will be by reference to the circumstances and conduct of the parties.

A tenancy at will is more likely to be implied where negotiations are taking place for a new lease. The terms of the new lease need not be framed by reference to the expired lease and the parties are not bound to agree a new lease in those terms. An implied tenancy at will exists until some other interest

-7-

is created. It will be on terms by reference to the expired lease except where inconsistent with the nature of a tenancy at will or where there is evidence of a different intention.

A periodic tenancy is more likely to be implied where there are no negotiations for a new lease (or the negotiations stall or break down) but the landlord and tenant relationship is still active. The principal example of an active landlord/tenant relationship is the demanding and acceptance of rent.

Whether the occupation is under a tenancy at will or a periodic tenancy is a matter of fact and the moment a periodic tenancy exists then (provided the tenant is using the premises for business purposes) the tenant will have a protected business tenancy. It is therefore advisable to avoid any argument as to whether a protected business tenancy has arisen.

The tenant may have evidential difficulties in arguing that there is a protected business tenancy where, for example: (i) new lease negotiations are active; (ii) during the period of time (if any) between expiry and the next rental payment or (iii) if the landlord rejects the next rent payment (in which case the tenant would struggle to argue that it was permitted to be there at all).

However, in the absence of a new lease having been entered into on or before expiry, an express tenancy at will to commence immediately after expiry is the only safe way of ensuring that a protected business tenancy will not arise.

A licence is highly unlikely to be implied where a former tenant remains in occupation after expiry. The fundamental basis of occupation would have to change for the occupation to be in the nature of a licence (e.g. no exclusive possession, no certain term, no rent). Even if the basis of occupation has changed, calling the occupier a licensee (whether express or implied) simply invites arguments about the nature of the occupation and should be avoided.

3.3.3 Liability for mesne profits and other losses

If a former tenant remains in occupation unlawfully as a trespasser after the end of its lease then the former tenant is liable to pay mesne profits. A former tenant is a trespasser if the former landlord has not given consent to the occupation and, more than that, the former landlord has not done anything that might imply acquiescence to it.

If it does something to consent or imply acquiescence then this will take the occupation out of the scope of ‘no consent’ and into the realm of implied tenant (at will or periodic) or licensee. If it makes clear it has not given consent then a mesne profits claim will arise. If it demands possession then the former tenant may also be liable for double value – as to which see below.

The liability to pay mesne profits applies even if the landlord has in fact suffered no loss, for example where the landlord would not have re-let or occupied the property during the period of the trespass.

The tenant may also be liable for other losses suffered by the landlord - for example, damages payable by the landlord to a person to whom the landlord has agreed to re-let the property but cannot do so because of the former tenant holding over.

Amount of mesne profits

The amount of mesne profits for which the trespasser is liable is equivalent to the ordinary letting value of the property.

If the tenant was paying a fair letting value for the property then mesne profits are awarded at that rate. If the tenant was paying less than the true letting value then mesne profits may be awarded at a rate exceeding the rent actually paid.

The trespasser will be liable to the landlord even if the landlord would not have let the property during the period of the trespass, although if this is the case, the trespasser's liability for damages is in the nature of restitution for unjust enrichment, i.e. the unjust benefit the trespasser has taken from the landowner.

-8-

There are no cases defining the precise basis of valuation for calculating mesne profits. It is considered that the valuation should be on the basis of a short term lease at a rack rent on the terms which would in practice form the terms on which the landlord would let the property.

3.3.4 Action for double value (after landlord's notice)

Section 1 Landlord & Tenant Act 1730 entitles the landlord to double the yearly value of the premises from a former tenant remaining in occupation after the landlord demands possession of the premises in writing.

The wording of this section is harsh on any trespasser holding over after the landlord's notice has been given. It expressly mentions the payment of double value to whoever is kept out of possession or their assigns, for as long as the situation continues, to be recovered by action of debt. There is no equitable relief and the statute is interpreted strictly.

There are certain requirements that the tenancy must have met for a claim to arise, including that the tenant must have had a term for years. The tenant must also have held over deliberately, not just by mistake or with a proper claim of title.

Demand and notice in writing

As well as the requirements above, there must also be a demand made and notice in writing given. This may be served before the expiration of the term requiring the tenant to deliver up possession at its expiration. The notice must be valid and binding and this is construed strictly.

No further notice is necessary and the double value will be calculated from the end of the term for as long as the tenant holds over.

Alternatively, the demand/notice may be given within a reasonable time after the expiry of the term. The landlord will then be entitled to double value from the time of the demand, not the end of the tenancy.

Double value – not double rent

The penalty is double value - as opposed to double rent. This is, of course, more favourable to landlords. The value is 'what an occupier would give, and the landlord would otherwise have received, for the use of the freehold and everything connected with it, during the time possession is withheld'. This includes double value of the land, property, tenancies and rights possessed by the trespasser.

3.3.5 Action for double rent (after tenant's notice)

Section 18 Distress for Rent Act 1737 entitles the landlord to double rent where the tenant has given notice to quit but does not give up possession when the tenancy ends at the expiry of the notice.

The statute only applies where the tenant is capable of ending its tenancy by notice and then has given a valid notice of its intention to vacate. For example, where the lease contains a break option the tenant has served the notice and complied fully with any conditions attached to it.

Also, the landlord must treat the tenant as a trespasser after expiry of the notice. For example, if the landlord claims that the notice was not valid so that the tenancy continues, it can't claim double rent.

Unlike the Landlord and Tenant Act 1730, this Act applies to all tenancies including valid oral tenancies from year to year. Another difference between this and double value is that, to be liable for double rent, the tenant does not have to hold over in deliberate breach.

Under this Act, the double rent may be recovered by suing in the same way as single rent would have been recovered before the tenant gave its notice.

-9-

4. Recovery of possession

4.1 Recovery of possession at the end of the term

The following applies to tenancies which are not protected by Landlord & Tenant Act 1954

4.1.1 Possession proceedings in court

When the tenant refuses to vacate at the end of the term the landlord can gain vacant possession by issuing court proceedings seeking possession of the premises. A claim for mesne profits, double rent or double value (as appropriate) should also be included in the proceedings. A possession claim can be determined reasonably quickly (within 6 – 8 weeks) provided the landlord can demonstrate (usually by production of a witness statement exhibiting relevant documents) that it has a right to possession of the premises.

Once the Landlord has a Possession Order from the Court, if the tenant still refuses to vacate the landlord can instruct the Court Bailiffs or High Court Sheriff to obtain vacant possession.

Alternatively, he can re-enter the premises provided there is no residential element provided he uses no more force than necessary. Peaceable re-entry however is not recommended to enforce a court possession order where the premises are occupied as a court order requires actual eviction of the tenant.

4.1.2 Changing the locks

If the premises are purely commercial premises the landlord may decide to simply change the locks in order to exclude the tenant who has overstayed his welcome. This is often the quickest and cheapest solution to the problem. However, please be aware it is not always the one your lawyer will recommend.

If you change the locks you may have the following problems:

• It may be difficult to permanently exclude the tenant and the landlord may end up having to pay for security to keep the tenant from returning.

• The landlord will be left with all the tenant’s belongings to deal with and, in the absence of any express provisions in the lease, will become the bailee of those goods with a responsibility to store and look after them.

4.2 Recovery of possession during the term for breach of covenant – forfeiture

The following sections apply to all tenancies i.e. those excluded from the protection of the 1954 Act AND those protected by the 1954 Act.

To claim possession during the term the landlord must have a right to forfeit the lease and such a right must be expressly set out in the lease i.e. a proviso for re-entry on breach of covenant a.k.a. a forfeiture clause. Most standard commercial leases contain a forfeiture clause.

The landlord may want to forfeit for breach of any of the lease covenants. If a lease is forfeited all interests created out of it will fall including those of any sub-tenants or mortgagees (subject to any relief that they might claim) and the lease will be at an end.

In order to forfeit a lease an act of re-entry is required by the landlord, either by peaceable re-entry (see below) or by the issue of court proceedings (see below).

It is important to understand that when a breach of covenant occurs the landlord must make a decision to either determine the lease or allow it to continue. Once the landlord is on notice of an act or omission that would permit him to determine the lease he must ensure he does nothing to waive the breach on which he may want to rely to determine the lease. ‘Waiver’ is discussed in more detail below.

4.2.1 Forfeiture for non payment of rent

The landlord must first establish that the rent and any service charges reserved as rent are due. (If the service charges are not reserved as rent any forfeiture action must proceed as set out at 4.2.2 below.)

-10-

Usually the forfeiture clause will provide that the right to re-enter will not arise until after the expiry of a fixed period (usually 14 – 21 days) after the rent falls due.

Most modern leases will state that formal demand for payment of rent is not required in order to forfeit. If not, a demand for rent must be made before a right to forfeit can be exercised.

Service of a Notice under s146 of the Law of Property Act 1925 is not required for non payment of rent prior to a landlord forfeiting the lease.

If all the above requirements have been satisfied and the landlord has not done anything to waive the breach of covenant the landlord can forfeit by either issuing court proceedings seeking possession (and the arrears of rent) or peaceably re-entering the premises.

4.2.2 Forfeiture for other breaches of covenant

Where the tenant is in breach of a covenant other than the covenant to pay rent, the landlord cannot exercise his rights under the forfeiture clause unless he has first served a notice under section 146 of the Law of Property Act 1925.

Contents of section 146 Notice

The notice must

• Specify the particular breach complained of;

• If the breach can be remedied it must require the tenant to remedied it (it does not have to tell the tenant how to remedy it). If the breach cannot be remedied there is no such requirement. However given the direction of case law (Savva v Houssein [1996] 47 EG 138) which held that all covenants (other than alienation) are remediable if the mischief caused can be remedied, the best approach is to require the breach to be remedied “if it is capable of remedy”;

• The tenant must be given a reasonable period of time in which to remedy the breach. What is reasonable will depend upon the facts and the breach.

• Require the tenant to make compensation in money for the breach, if the landlord requires compensation

• Where the landlord is serving a s146 Notice in respect of breaches of the repairing covenants AND where the original lease was for a term of 7 years or more and more than 3 year are left unexpired of the term at the date of service of the s146 Notice, the Notice must comply with the requirements of the Leasehold Property (Repairs) Act 1938. The Notice must be served on the tenant at least one month prior to issuing proceedings and it must state that the tenant has a right to serve a counter-notice within 28 days. If a counter notice is served the landlord cannot forfeit the lease without leave of the court. In seeking leave the landlord must establish one of the five grounds in the Act1.

If the breach is not remedied within the reasonable time specified and there has be no waiver of the breach, the landlord can proceed to forfeit the lease by peaceable re-entry or by court proceedings. If the breach is incapable of remedy, the landlord should still wait a short time, say 14 days.

1 Section 1(5) of the Leasehold Property (Repairs) Act 1938 states that leave to forfeit shall not be given unless the landlord proves - (a) that the immediate remedying of the breach is requisite for preventing substantial diminution in the value of his reversion, or that the value thereof has been substantially diminished by the breach; (b) that the immediate remedying of the breach is required for giving effect in relation to the premises to the purposes of any enactment, or of any byelaw or other provision having effect under an enactment or for giving effect to any order of a court or requirement of any authority under any enactment or any such byelaw or other provision as aforesaid; (c) in a case in which the lessee is not in occupation of the whole of the premises as respects which the covenant or agreement is proposed to be enforced, that the immediate remedying of the breach is required in the interests of the occupier of those premises or of part thereof; (d) that the breach can be immediately remedied at an expense that is relatively small in comparison with the much greater expense that would probably be occasioned by postponement of the necessary work; or (e) special circumstances which in the opinion of the court, render it just and equitable that leave should be given.

-11-

There is no obligation to serve a sub-tenant or mortgagee with a section 146 Notice although as a practical measure it is a good idea as the subtenant or mortgagee may be able to put pressure on the tenant to remedy the breach

4.2.3 Waiver

Where a breach of covenant occurs, once the landlord has knowledge of it he must decide whether to determine the lease or allow it to continue (by waiving the breach). The landlord will lose his right to forfeit if he does any act which recognises the continuation of the tenancy after becoming aware of the breach.

The law if complex and great care must be taken.

The landlord must have knowledge of the breach when the act of waiver occurs although knowledge by a landlord’s employee is sufficient. If the landlord has knowledge but upon enquiry of the tenant, he is falsely persuaded that there is no breach there will be no waiver.

The test of waiver is set out in Central Estates Belgravia Ltd v Woolgar (No 2) [1972] 3 All ER 610. The test is objective and the landlord’s intentions are immaterial. Once the landlord has knowledge of the breach and acts in a way which unequivocally recognises that the lease continues (in that case an error by a clerk which led to the rent being demanded) this constitutes waiver.

Waiver requires a positive act on the part of the landlord. Acts of waiver include:

• Demanding or accepting rent. Rent should not be accepted on a “without prejudice basis”. If payments are made by the tenant and the landlord accepts them as mesne profits or payment for use and occupation this may not constitute waiver but legal advice should be taken. Payments tendered by the tenant as “rent” cannot be accepted as mesne profits without waiving the breach. Where a landlord told a tenant that no further rent payments would be accepted and the tenant paid rent directly into the landlord’s bank account this was not a waiver as the landlord returned the rent. Rent can be accepted if it fell due for the period prior to the breach of covenant (as this rent is due even if the lease is terminated). However, it is usually safer not to accept any payments to avoid giving the tenant an argument on waiver.

• Entering the premises to carry out repairs

• Sending in the Bailiffs (levying distress)

• Granting any type of licence under the terms of the lease.

• Serving notices under the terms of the lease eg rent review, s25 Notices

However the service of a section 146 Notice is not itself a waiver.

Waiver will only affect breaches that occurred prior to the act of waiver. If the breach re-occurs or continues thereafter a new cause of action will arise to permit the landlord to make a new election of whether or not to forfeit.

Care should therefore be taken with regard to “once and for all” breaches eg those breaches which are characterized by a covenant which requires an act to be carried out by a certain time (e.g. payment of rent) or a covenant which prohibits an act (eg unlawful alienation, insolvency, unauthorized alterations). Waiver will be fatal to the landlord’s right to forfeit.

With continuing breaches both the obligation and the breach will be of a continuing nature (e.g. disrepair, failure to insure, wrongful use). Here a landlord can waive an earlier breach but his right to forfeit will continue in respect of later breaches after the act of waiver.

4.2.4 The “act” of forfeiture - court proceedings or peaceable re-entry?

a) Court proceedings

It is strongly advised that where any premises contain an element of residential accommodation the landlord should proceed by way of court proceedings (s2 Protection from Eviction Act 1977).

-12-

Where forfeiture occurs by the issue of court proceedings the lease is forfeited on the date of service of the court proceedings. The subsequent order for possession has retrospective effect to the date of service of the proceedings.

The court proceedings should set out the following details:-

• The land should be identified

• Detail of the tenancy including the right to forfeit

• If necessary, the service of a s146 Notice (see above)

• Whether the claim relates to residential premises

• Details of the breach

• Details of anyone who might be entitled to claim relief from forfeiture such as a subtenant, mortgagee.

In straightforward proceedings a court hearing should follow within 7 to 12 weeks depending on the courts schedule.

Insolvency of tenant

Where the tenant is in any form of insolvency extra care needs to be taken. Please see the table at the back of the notes which provides a guide to whether forfeiture is possible in a range of insolvency situations.

b) Peaceable re-entry

Peaceable re-entry for non-payment of rent or other breach of covenant is a self-help remedy which does not involve any court proceedings. It takes effect from the date of re-entry.

There must be some final and unequivocal act by the landlord to constitute re-entry. He need not evict the tenant – he simply has to re-enter. It is normally dealt with by changing the locks so as to exclude the tenant; alternatively, the grant of a new lease to a third party.

Insolvency of tenant

Where the tenant is in any form of insolvency extra care needs to be taken. Please see the table at the back of the notes which provides a guide to whether forfeiture is possible in a range of insolvency situations.

Method

Peaceable re-entry must not be used if any part of the premises is residential.

The act of re-entry must be without violence if there is someone on the premises who is opposed to the entry and therefore great care must be taken. It has been held that breaking down a door is likely to be violence (Hemmings v Stoke Poges Golf Club [1920] 1 KB 720) but breaking locks is not (Razzaq v Pala [1997] 38 EG 157). In practice most re-entry takes place either in the middle of the night or in the early morning as it is wise to only re-enter when the premises are unoccupied. If violence is found to be used there is criminal liability under the Criminal Law Act 1977.

A prudent landlord should either instruct certified bailiffs who have experience of effecting peaceable re-entry or alternatively should follow the following procedure:-

1. Write to the tenant regarding the breach. If the breach is non-payment of rent the tenant should be warned that if they don’t pay within a set period the landlord proposes to forfeit the lease. The method of forfeiture should not be specified. If the breach complained of requires service of a s146 Notice, this should be served and time given to remedy the breach.

2. Assuming the breach continues, inform the Police that the landlord is going to re-enter and provide the date and time and invite them to attend.

-13-

3. Choose a quiet time to re-enter when the possibility of resistance is unlikely.

4. The landlord or his agent should attend the premises with a locksmith for the express purpose of forfeiting the lease. If anyone is met at the premises they should be told the purpose of the visit. If there is any resistance, walk away. If there is no resistance the Landlord or his agent should then peaceably re-enter using minimum force and without violence to the premises, walk through them and change the locks. Make a contemporaneous note as a record of the steps taken in case there is any future problem.

5. Put up a notice at the premises stating that peaceable re-entry has been effected, giving contact name and a warning that entry onto the premises is not permitted with the written permission of the landlord.

6. Write to the sub-tenant explaining that forfeiture was effected by peaceable re-entry (giving the date) and that the lease is at an end. State that unless there is an application for relief from forfeiture within 14 days the landlord proposes to re-let the premises.

4.2.5 Relief from forfeiture

Where the landlord has proceeded to forfeit by the issue of court proceedings the tenant, the sub-tenant or mortgagee may apply for relief pursuant to s 146(2) of the Law of Property Act 1925 as part of the Counterclaim.

Where the landlord has proceeded to forfeit the lease by way of court proceedings, relief from forfeiture for non-payment of rent will automatically be granted if the tenant pays all the arrears (including mesne profits due since the court proceedings were issued) and costs of the action not less than 5 clear days before the hearing. If not, the court will make an order for possession to take effect not less than 4 weeks from the date of the order unless the tenant pays into court all arrears and costs by that date.

If he does not qualify for this automatic relief and possession is granted he may apply for relief within 6 months of the landlord obtaining possession

Where the landlord has proceeded to forfeit by peaceable re-entry, the tenant must make an application to court without “undue delay” and probably within 6 months.

The court has discretion as to whether to grant relief on such terms as it thinks fit including costs, expenses and damages. It will usually grant the tenant relief where the tenant has already remedied the breach or will grant relief conditional upon the tenant remedying within a specific time. The tenant will ordinarily be responsible for the costs of the proceedings.

5. Break

5.1 Nature of break clause

A break is in the nature of an option and it operates to end the lease before the fixed term expires. This may be an unconditional right or subject to conditions set out in the lease.

Options are always strictly construed and this is particularly important in respect of time limits and conditions for exercise of the option. Time will be of the essence unless the lease says otherwise.

5.2 Who may exercise the break?

A break right is exercised unilaterally and may be available to the landlord, the tenant or both. It may be drafted to be personal to the original tenant or it may also be available to its successors in title. If the lease includes a break right but is silent as to who may exercise that right then only the tenant may exercise it.

Unless the lease expresses the option as being personal to one particular party, it is exercisable by successors in title to the original parties. This is the case even if the lease does not define the landlord and tenant as including successors in title.

-14-

Unless the lease says something different, then where there is more than one landlord or tenant party, e.g. joint tenants, the notice must be served by and on all the relevant parties. Otherwise, the notice will be ineffective.

5.3 When the break may be exercised

A break clause may be drafted to give a rolling right (e.g. on 6 months notice at any time) or the right to break on one or more specified dates only.

5.3.1 Fixed / rolling dates

A fixed tenant's break is the most common type of break clause. The tenant will be able to break the lease on one or more dates during the term, sometimes at dates that are tied in some way to the rent review dates.

Where there is a rolling break this will usually mean giving, for example, no less than [6] months from the date of service of the notice. In that case the break date should be specified in the notice itself. The lease should be checked to see whether the break notice can be served immediately or a specified period of time into the term.

5.3.2 Serving the notice

Whether the break is fixed or rolling, careful attention must be paid to the requirements of the lease when serving the notice. Because a break clause is in the nature of an option, time will be of the essence unless the lease says otherwise.

This means that everything to do with serving the notice must be strictly adhered to. This includes:

a) Period of notice

The lease could require a fixed notice period (e.g. 6 months exactly) or the more flexible "not less than" [e.g. 6 months]. Where there is any debate about the exact period of notice required to be served, it may be wise to serve 2 or even 3 notices, each without prejudice to the validity of the others, to cover all bases.

b) Address for service

The correct address as provided for in the lease should be served. The relevant provisions as to service of the notice may be mandatory (i.e. service must be done in the specified way) or permissive (i.e. service may be done in the specified way).

c) Party authorised to serve the notice

If the lease states who may sign the break notice then this will override the common law rules on actual and ostensible authority. This means that, as long as the break notice is signed by whoever the lease says it should be signed by, that signatory has sufficient authority for the purpose of the break.

Where there are joint tenants the break must be exercised by all of them unless the lease contains express authority for one (or more) to exercise it on behalf of them all. Where one (or more) joint tenant wishes to exercise the break on behalf of all of them, the lease should be checked to see whether this is permitted.

Where the notice is being served by an agent, the existence and authority of the agency should be set out on the notice.

d) 1954 Act protected tenancies

It should be noted that, where there is a landlord’s option to break contained in a protected lease, in addition to serving the break notice the landlord must also comply with the statutory procedure (detailed by Helen earlier) on exercise of the break.

-15-

e) Conditions

Compliance with any conditions required to be met on service of the notice. Break clauses are often subject to conditions and they are strictly construed. These are looked at in more detail below.

5.3.3 Problems with service

If the lease prescribes a particular form of notice, this form must be used. However, if no particular form is prescribed, a minor defect will not necessarily invalidate the notice if the reasonable recipient, with knowledge of the factual and contextual background, will “not be perplexed by the error”.

Generally a notice served by or on the wrong person will be invalid. However, if the landlord would not have been misled by the error it may be possible to save the notice.

Where there is a mandatory method of service and that method is not complied with, because, for example, it is sent to the wrong address, the notice may be invalid even if it is in fact received.

5.4 Break conditions

5.4.1 Types of break condition

Break conditions may be absolute (aka unqualified) or qualified.

a) Absolute conditions

An absolute condition will prevent the tenant from breaking the lease if there is a subsisting breach of covenant or condition at the relevant time no matter how trivial, provided that the breach has not been remedied.

For example, if the lease requires the property to be painted in the last year of the term and it is painted a few days before the beginning of the last year, the condition will not have been complied with and the tenant will be unable to exercise the break, despite the fact the damages for this breach would have been nominal.

Note that if there has been a breach, but it has been remedied by the relevant time, the tenant will have complied and can exercise the break.

b) Qualified conditions

Alternatively the condition may be qualified by words such as “reasonably”, “substantially” or “materially”. “Reasonable” compliance requires the tenant to have behaved in a way that a “reasonably minded tenant might well behave”. What this actually means in practice will depend on the facts of the particular case.

“Material” and “substantial” are generally regarded as interchangeable and compliance is assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expense. It does not mean that the parties should be taken to have intended that minor breaches are permitted if these minor breaches have a significant impact on the ability to re-let or sell.

Even a covenant which has been watered down by words such as “reasonable” or “material” can trip up the tenant as exactly what is reasonable or material will be different in every case. However, from a tenant’s point of view a qualified covenant is clearly preferable to an absolute one.

5.4.2 Relevant time for compliance

The date by which any break conditions need to be complied with could be the date of service of the break notice or on the break date. This will depend on the construction of the break clause and needs to be checked to ensure compliance.

5.4.3 Examples of break conditions

Common provisions which a landlord may try to include are the payment of sums due, vacant possession and compliance with repair covenants. Where these

-16-

conditions are absolute, any subsisting breach, no matter how trivial, will prevent the tenant from exercising the break.

a) Payment of sums due

Care must be taken to check which payments are due in order to effectively exercise the break. The condition may require all payments due as at the break date to have been made in order for the break to be effective. Alternatively, the condition may be restricted just to the main rent or the main rent and the service charge.

Basic rent

If the fixed break date falls on a rent payment day - or any other day that is not the final day of a rent period - and the break clause requires the basic rent to be up to date then the full quarter's rent must be paid, not just the part due up to the break date. Ideally therefore the break date (or the expiry of a rolling break notice if possible) will fall on the day before a rent payment day.

If the break date falls on any other day the lease should be checked to see whether it provides for: (i) the rent to be paid only up to and including the break date; or (ii) for a refund of rent paid in advance in respect of any period following the break date.

Service charge

If the service charge is included as a sum to be paid as a condition of the break then a tenant would want to see this limited to undisputed sums to be paid when ascertained and demanded.

Amounts which are unascertained, including service charges, can cause particular problems as they may be “due” even though they have not been finally determined.

Insurance rent

Equally the tenant may want to provide for a refund of insurance rent paid in advance in respect of the period after the break date. Whilst the landlord could agree to pass on any refund of the premium it receives from its insurers, the lease is unlikely to contain anything more than this.

Disputed sums

Great care must be taken with regards to disputed or queried sums. Unless disputed sums are not part of the condition, failure to pay a disputed amount is a failure to pay a sum due and invalidates the break.

It may be necessary for a tenant to pay any outstanding sums due on a without prejudice basis and argue about them later. For a large tenant with a number of premises the accounts department should be instructed to pay all sums demanded in respect of the relevant premises, even if they may normally have queried them, as the failure to pay even a small amount may invalidate the break.

b) Vacant possession

A condition that vacant possession is given at the break date is often included by the landlord.

The distinction between giving up occupation and giving vacant possession is slightly unclear, but giving up occupation seems to be a lower level requirement which simply involves moving out and returning the keys. Giving vacant possession requires the removal of chattels (for example, office furniture) from the property, which may be left even though occupation has been given up.

An obligation to give vacant possession is an obligation to make the property available in a state in which the landlord can both physically and legally occupy it. What in practice vacant possession means depends in part on the particular circumstances of the case. If large quantities of rubbish or chattels

-17-

are left at the property, vacant possession will not have been given. Fixtures do not have be removed in the absence of a requirement to the contrary, but the distinction between fixtures and chattels is somewhat blurred so care needs to be taken when considering what must be removed in order to satisfy the condition.

c) Repair and decoration

If the lease contains a general condition requiring compliance with all tenant’s covenants this is highly onerous for the tenant and means the break is likely to be almost impossible to exercise effectively. It is more common to see a condition which requires compliance with the repair and decoration covenants in the lease.

A failure to comply with the condition in some very minor respect will severely penalise the tenant by invalidating the break. In comparison, the landlord’s rights in respect of an antecedent breach will be preserved (whether in the lease or by common law) and so the landlord can still pursue a dilapidations claim in respect of any breaches after the lease has ended.

If the condition is worded so that any [material] breach must be remedied then the tenant may need to have its own survey done in order to ascertain exactly what work needs to be carried out and then ensure that this work has been done before the break date. The tenant may be able to persuade the landlord to confirm in advance of the break date that the condition has been complied with.

Alternatively, the landlord may be willing to enter into a financial settlement in return for a waiver of this condition. However, unless the provision requires it, the landlord is under no obligation to do any of these things and a landlord who wants to prevent the break from taking place is unlikely to agree to this.

If the condition is worded so that the landlord must specify any breaches it requires to be remedied by the break date, this is more favourable to the tenant as it moves the burden of specifying the breaches onto the landlord. If the landlord fails to refer to a particular want of repair, the tenant need not remedy this in order for the break to be effective (though the landlord will still be able to recover damages for this breach unless otherwise specified).

Attention must be given to any specified notice periods for the landlord to serve notice and the tenant to do any required works. For example, if time is not of the essence in relation to the service of a landlord’s notice of repairs then the landlord would be able to serve a notice a week before the break and the tenant’s failure to comply would invalidate the break. The lease should be checked to ensure that each party is aware of its obligations.

5.4.4 Waiving compliance with conditions

Either party may waive a requirement to comply with a condition. The waiver may be made in writing, or orally, or inferred by conduct.

Waiver by a landlord may occur where he accepts possession following a purported exercise of a break. However, there will be no waiver until the landlord knows all of the material facts, that he has a right to choose between waiving or not and that he knows the legal effect of each choice.

If the landlord does want to dispute the tenant’s right to break, it should not do anything which may amount to a waiver. If it (or its agents) has to accept keys or take security measures as a requirement of its insurance policy, this should be done only and expressly on a without prejudice basis.

5.5 Practical issues for the tenant

5.5.1 Before service of the notice

• Check whether there are any conditions which need to be complied with as at the date the notice is served.

-18-

5.5.2 Service of the notice

• Ensure that the notice is served in good time and strictly in accordance with the terms of the lease – check whether a prescribed form is required.

• Keep evidence as to posting and delivery. Request that the landlord acknowledges receipt, particularly where there are no deeming provisions.

• Where the notice is served by an agent, disclose the existence of the agency and the agent’s authority in the notice itself.

5.5.3 Compliance with conditions

• Consider carrying out a compliance audit to ensure that all conditions have been met and then take steps to remedy any breaches.

• Consider asking the landlord for confirmation of the steps that the tenant needs to take in order to comply with the conditions, for example a schedule of dilapidations in relation to repair works.

• Ensure that any sub-leases are properly terminated and that sub-tenants have fully vacated the property.

• Pay any outstanding sums due even if they are in dispute. Payment can always be made on a without prejudice basis and argued about later.

• Consider asking that the break notice be accepted upon payment of an agreed amount of liquidated damages in relation to outstanding breaches.

• Ensure that any waiver by the landlord is not made “without prejudice” and that it is clear which conditions the waiver applies to.

6. Surrender

6.1 What does surrender mean?

Surrender means that the tenant’s leasehold estate is acquired by the landlord. It is a type of conveyance and operates to bring the term to an end.

Surrender is not effective unless it is accepted by the landlord. A landlord will therefore not agree to accept surrender unless it is on terms acceptable to it.

6.2 Types of surrender

6.2.1 Express surrender

Express surrender must be made by deed otherwise it is not valid. No particular words are necessary in an express surrender if it appears to be the intention of both parties that the term should immediately end. To be safe, the words 'surrender and yield up' should be used.

The surrender must take effect immediately it is made. If it is expressed to take effect at a later date then it will operate as an agreement to surrender at that date.

An express surrender will usually contain a mutual release of the lease covenants, either past, present and future or leaving open the possibility for action in respect of breaches existing at the date of surrender.

6.2.2 Surrender by operation of law

a) Generally

While usually a conveyance must be made by deed, this does not apply where the surrender is made by operation of law.

It is inferred from the conduct of the landlord and tenant. In effect, there must be some act done which is inconsistent with the continuance of the lease. To be sufficient, the conduct of both parties must unequivocally amount to an acceptance that the lease has ended.

This means the tenant handing back possession of the property and this being accepted by the landlord, or other conduct only consistent with the end of the lease. Mere vacation of the property by the tenant is not enough. The

-19-

circumstances must be so clear as to mean it would be ridiculous for either the landlord or tenant to subsequently argue that the lease has not ended.

b) Acceptance of key

Where surrender is being done by operation of law, usually in practice the tenant vacates and returns the keys, ideally obtaining written confirmation from the landlord that it has received them.

The tenant must give the keys to someone authorised to accept them, although it may be that giving the key to one of two joint landlords would work on the basis that the one joint landlord may have authority to accept surrender as agent for both of them.

6.2.3 Surrender and re-grant

This is a type of surrender by operation of law but the surrender operates due to the landlord granting a valid new lease to the tenant. It operates this way because the landlord would not be able to grant a new lease unless the old one had been surrendered.

Prime examples of this are where the landlord purports to extend the term of the lease or add land to the demise. Neither of these can be done if the lease continues to exist as there would, purportedly, be two leases of the same land for the same term and both taking effect in possession. In each case the nature of the legal estate is changing and the situation can only be explained as a surrender of the lease and the grant of a new lease for the extended term or demise.

The new lease must be valid. It cannot in law be the intention of the parties for a lease that was void or voidable to replace a good lease. If the new lease is in some way not a valid document then the first lease will remain in force.

The new lease must be expressed to begin during the term of the existing lease. If it begins afterwards then there is no inconsistency between the two interests and therefore no need for surrender.

Purported variations of a lease

If a lease is stated to be varied, this may in fact operate as surrender and re-grant depending on the nature of the variation. If the variation cannot be effected without the grant of a new lease, then it will constitute surrender and re-grant rather than a variation.

Where the nature of the legal estate is changing (as above, the prime examples being extension of the term and adding to the demise), a deed of variation purporting to make these changes will have the effect of implying the surrender of the existing lease and grant of a new lease with the change in demise or length of term.

If neither of these fundamental elements will be altered then generally there will be no surrender and re-grant and the deed of variation will work to document the change.

It is not workable to use a deed of variation in either of these cases. What will happen is that the deed will simply be recorded by the Land Registry on the leasehold title. The effect of this is to show on the title evidence of the surrender of the lease while not properly registering the re-grant as required by law.

Where the demise or the term is changing then to be effective these will need dealing with alternatively, e.g. by a separate lease of the additional land or a reversionary lease covering the additional time required.

6.3 Surrenders of part

Surrender of part may be done expressly or by operation of law.

An express surrender of part is effective if done by way of deed of variation reducing the demise (and making any other variations required). Any guarantor should join into the deed to confirm that it will guarantee the remaining part, otherwise it may be released from the whole of its liability.

-20-

Surrender of part by operation of law may occur if the tenant gives up possession of part and this is accepted by the landlord (e.g. by taking possession of that part and accepting a reduced rent for the remainder). This may release any guarantor under the lease being part surrendered so, if there is a guarantor, the surrender should be documented expressly and the guarantor joined in to prevent it being released from the whole of its liability.

If the tenant simply accepts a new lease of part only of the property comprised in a lease, this operates as a surrender of that part only and not of the whole. There is nothing dealing with the remaining part so the old lease stays in force in relation to that part. The covenants in the old lease will be interpreted to be apportioned accordingly. As there has been surrender of part of the first lease, any guarantor may also be released. This situation should be avoided by dealing expressly with the whole of the first lease.

6.4 Effect of surrender

6.4.1 Between landlord and tenant

The term ends on the date of the surrender and the landlord obtains a right of recovery of possession from that date.

Unless expressly provided for otherwise, the tenant is not entitled to a refund of rent paid in advance. Likewise, each party will be released from future covenants but remain liable for past breaches unless the surrender deed provides otherwise. The surrender deed may deal with past breaches, e.g. by providing for a payment of liquidated damages in satisfaction of them.

6.4.2 Effect on guarantors

Unless the deed of surrender says otherwise, surrender will release a guarantor from future liability but not from liability for past breaches.

6.4.3 Effect on sub-tenants

Surrender of a lease does not end a sub-lease previously granted. This is the case even if the sub-lease was granted in breach of covenant and the landlord did not know that the sub-tenant was in occupation at the date of surrender.

The head landlord will become the sub-tenant’s direct landlord on the terms of the sub-lease. Ascertaining the terms of any sub-leases will therefore be part of the (head) landlord’s investigation of title before accepting a surrender.

6.4.4 Stamp duty land tax

Whether this is payable on a surrender (by deed or operation of law) depends on a number of factors including the direction that any premium is being paid. The provisions as to SDLT on surrender are complex and beyond the scope of today’s seminar.

6.5 Practical issues for the parties

6.5.1 Landlord

• Where the tenant has requested to surrender, the landlord does not have to accept surrender except on terms acceptable to it. Conversely, where the landlord is initiating the surrender, the tenant will be able to dictate the terms.

• It should investigate the title, including:

o searching to see whether there any mortgages affecting the lease (so that arrangements can be made for discharges);

o inspecting the property to reveal any unauthorized occupiers and to check the extent of any breach of repairing and decorating covenants;

o full documentation relating to any sub-leases should be obtained since the landlord will take the surrender subject to sub-leases (even if they were granted by the tenant in breach of covenant);

-21-

o other searches including at the Land Registry, Local Authority and Companies House; and

o commercial property standard enquiries should be raised of the tenant.

6.5.2 Tenant

• The tenant must bear in mind that, where it has initiated the surrender, the landlord does not have to agree to it. It should expect to have to agree to terms satisfactory to the landlord, depending on the circumstances involved. Likewise, where the landlord wants the property back (eg for redevelopment) the tenant will have the upper hand in negotiating a deal.

• The tenant should check the terms of the lease carefully to ascertain the remaining liabilities, including any that can be required on yield-up. While the landlord does not have to agree to the surrender at all, any arrangement should not involve the tenant performing obligations over and above those in its lease.

7. Terminal dilapidations and reinstatement

Most claims by landlords for disrepair are made at the end of the lease when the landlord serves a terminal schedule of dilapidations on the outgoing or former tenant. Both RICS and the PLA have expressed concern in recent years that claims are advanced for the purposes of negotiation which are in fact unsustainable on any proper basis. This should be avoided at all costs (see the article by Firn, Stell and Edwards in the Estates Gazette 20.9.08).

More often than not the lease will contain an express covenant to repair and a considerable body of case law has built up concerning the extent of the tenant’s obligations to repair.

However for the purposes of this seminar we will proceed on the basis that there is disrepair or reinstatement required at the end of the term.

7.1 Disrepair

Section 18 (1) of the Landlord & Tenant Act 1927 states as follows:

“Damages for a breach of covenant or agreement to keep or put premises in repair during the currency of a Lease, or to put premises in repair a the termination of a Lease, whether such covenant or agreement is expressed or implied, and whether general or specific shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement as aforesaid; and in particular, no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a Lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement”.

This means in particular that no damages can be recovered if it is shown that the premises would, at or shortly after the end of the tenancy, have been or be pulled down or structural alterations made to them as would render the repairs valueless.

This section imposes a “ceiling” on the amount of the damages which can be recovered. The section is divided into two “limbs”.

The first limb imposes a diminution in value of the reversion “ceiling” and applies to actions brought both during the term and at the end of the term.

The second limb applies to actions brought at the end of the term and provides that no damages whatever will be recovered if the landlord would pull down or so alter the premises that the works would be rendered valueless. The second limb is time sensitive and applies at the date the lease ends.

At the end of the term the cost or estimated cost of the repairs is highly relevant and may well be the proper measure of damages or, at least, a very useful guide. The best approach to determine the tenant’s responsibility is to assess the cost of carrying out the repairs and then to assess the diminution in value to the reversionary interest (by valuing

-22-

the premises in a repaired state and in the state of disrepair) and the lesser of the two sums will be the recoverable amount.

The Heads of loss (always subject to the s18 limit) can include not only the cost of repairs but also:

• loss of rent

• solicitors and surveyors’ costs if the leas so provides

• VAT if the landlord is not registered for VAT and only if there is a realistic chance that the works will be done

• Service charge and rates for the period of the repair works.

7.2 Pre-action Dilapidation Protocol

The Property Litigation Association has published the Dilapidations Protocol 2008 version (http://www.pla.org.uk/library.html). It has not been formally adopted for the purposes of the Civil Procedure Rules however the CPR does require parties to behave reasonably and therefore, as a matter of good practice, the Protocol should be followed where possible. It has been endorsed by the Royal Institution of Chartered Surveyors (RICS) in its Guidance note (Dilapidations - A Guide to Best Practice, 5th edition) (RICS Best Practice Guidance on Dilapidations).

7.3 Claim not settled

If the claim is not resolved before issuing court proceedings the landlord must quantify the claim with a detailed breakdown based on a formal diminution valuation by a valuer or an account of actual expenditure or a combination of both.

7.4 Reinstatement

A covenant to reinstate may arise at the end of the lease or on the operation of a break clause. It may be a stand alone covenant or may arise under the covenant restricting alterations in the body of the lease. Alternatively, it may arise in any Licence for Alterations granted during the term of the lease.

The covenant may require tenants to reinstate any alterations made by the tenant at the end of the term or alternatively, reinstatement may only be necessary, if requested by the landlord.

A covenant to reinstate is not caught by section 18(1) and if the tenant does not reinstate the landlord has a claim for costs of works of reinstatement in full provided the landlord does in fact do the works. In the event the works of reinstatement are not carried out by the tenant and the landlord does not intend to do them, the landlord could claim any diminution in value as his loss.

In the circumstances both tenants and landlord need to check any Licences to alter or do works granted during the term well in advance of the termination date to check for obligations to reinstate.

Where reinstatement is necessary “only if the landlord requires it”, a landlord should give reasonable notice to a tenant to allow the works of reinstatement to be carried out during the term. However, the landlord can still give notice on the last day of the term that reinstatement is required. This would be too late to allow the works to be carried out by the tenant during the term and therefore arrangements should be made to allow the tenant access after expiry.

• Check the lease and any licences in advance of termination to understand reinstatement obligations.

• Communicate! If a landlord confirms that reinstatement is not required ensure that you have this in writing and that it is unequivocal.

8. Conclusion

This brief run through has hopefully given you the information that you need in order to understand the main ways in which a lease can come to an end and also to establish which method of termination is appropriate in particular circumstances.

-23-

The key point to remember is that every lease is different so you should never assume that it will be possible to bring a lease to an end in a particular way. Depending on how the lease will be terminated it may be necessary to serve notices on specified dates, follow a strict procedure or enter into the correct documentation. Unless you are sure that you understand what need to be done, you should always take legal advice at an early stage.

-24-

Annex Forfeiture in an insolvency situation

Forfeiture by Peaceable Re-entry

Forfeiture by court proceedings

LPA Receiver

(Lender with fixed charge appoints Receiver who can sell charged assets).

Yes Yes

Administrative Receiver

(Debenture holder created before 15.9.2003 with floating charge appoints Receiver who can sell assets as a going concern).

Yes Yes

CVA

Debtor company reaches compromise with creditors.

Depends – consult solicitors Depends – consult solicitors

Administration

(Court appointment or out of court appointment).

No - not unless court gives permission

No - not unless court gives permission

Creditors Voluntary Liquidation

(Debtor company passes resolution to wind up/Creditors appoint liquidator to realise assets and distribute).

Yes Yes but Liquidator can apply for a stay

Compulsory Liquidation

(Winding up petition by Creditor. Court appoints Liquidator to realise assets and distribute).

Yes Not without leave of the court

IVA

Individual debtor reaches compromise with Creditors. May bind Landlord even without notice. If interim order there is a moratorium.

Depends:

During interim order permission of court required. After IVA seek advice.

Depends:

During interim order permission of court required. After IVA seek advice.

Bankruptcy

Court appoints Trustee to realise assets and distribute to creditors

Yes Yes