Surrender of a lease

The recent case of Dreams Limited -v- Pavilion Property Trustees Limited (May 2020) provides important lessons for both landlords and tenants who have agreed a surrender of a lease. The main issues in this case focused on:

1. whether the landlord could refuse to complete the surrender after the tenant had agreed to offer up vacant possession; and
2. whether an express condition precedent of the surrender agreement that the tenant should pay “all money due” resulted in an obligation on the tenant to settle a dilapidations claim before the surrender date in order for the surrender to proceed.

Background facts

The tenant (Dreams) and the landlord (Pavilion) entered into an agreement to surrender the tenant’s lease. The tenant could exercise the surrender by providing the landlord with six months’ written notice of its intention to surrender.

The agreement between the landlord and tenant incorporated the Standard Commercial Property Conditions that are normally used upon a property sale.

The three key terms of the agreement were:

• Clause 6.2: “it is a condition of completion that the tenant is to pay any money due on completion”
• Clause 8: “The surrender is with vacant possession”
• Clause 11.1.8 , which provided for the release of the tenant from its liabilities, covenants and obligations under the lease, following completion of the surrender.

The tenant served notice on the landlord to exercise the surrender and the landlord subsequently served a Schedule of Dilapidations on the tenant. The tenant failed to remove a mezzanine floor and a lift from the property which had been installed by a previous tenant. An issue arose as to whether those items needed to be removed in order for the tenant to provide vacant possession.

In the run up to completion, the landlord claimed that the tenant needed to pay the sum of £173,000 as claimed in the Schedule of Dilapidations in order to satisfy the condition at clause 6.2. The tenant countered that as the dilapidations claim had not been settled, there was no current sum due and, upon surrender of the lease, clause 11.1.8 released the Tenant from its dilapidations liabilities.

Not wanting to lose its dilapidations claim under clause 11.1.8, the landlord claimed that the tenant could not force through the surrender as the surrender was conditional upon vacant possession being provided.

The Court’s decision

The Court decided that the unresolved dilapidations claim would not fall within the meaning of “any money due” and therefore settlement of the dilapidations claim would not be an express condition of the surrender completing.

Therefore, the surrender could go ahead without the dilapidations claim having been paid off and the landlord’s dilapidations claim would fall away under the provisions of clause 11.1.8 when the surrender did complete.

That left the issue as to whether the landlord, by relying on clause 8, could refuse to complete the surrender if vacant possession had not been given up. The tenant pointed out that, unlike clause 6.2, clause 8 did not expressly stipulate that the surrender was conditional upon vacant possession being provided. As a result the landlord’s remedy would be to claim damages from the tenant for failure to provide vacant possession.

The Court disagreed with the tenant’s argument and held that the parties had agreed to structure the transaction as a sale of land incorporating the Standard Conditions. The Court decided that on any sale of land, where the parties had agreed that vacant possession would be provided, the buyer (in this case the landlord) could refuse to complete unless and until vacant possession was provided.

When/if completion were to take place the landlord would lose its sizable dilapidations claim, but nonetheless the landlord can refuse to complete unless and until vacant possession is provided.

Oliver Ray is a solicitor specialising in commercial property law in the Property department at Barker Gotelee Solicitors in Ipswich.

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