Lease Surrender – Potential Pitfalls

Any tenant surrendering a lease before the end of the contractual term will assume that this terminates all their obligations to the landlord and they can “walk away”. Often a premium is paid to the landlord in return for the early exit from the lease. However, a recent case has raised a serious pitfall where the landlord has a mortgage – the lender did not consent to the surrender and the surrender was ineffective.

The case is Co-operative Bank plc v Hayes Freehold limited (in liquidation) where a deed was completed which purported to effect a surrender of a headlease and an underlease. It also provided for the unconditional and irrevocable release of the undertenant’s guarantor. Both the freehold title and the underlease were charged to Co-operative Bank and, under the terms of the charge, the bank’s consent was required to a surrender or any other dealing with either lease. The bank had not consented to the surrenders and so its position was that the deed of surrender was void.The undertenant’s guarantor argued that, although the bank’s consent was required for the surrenders, it was not required for the release of the guarantee.

The head tenant (Deutsche Bank) was in a difficult position as it had no use for the premises and did not want its liabilities in the headlease to continue if the undertenant and undertenant’s guarantor were released. Deutsche Bank therefore bought interim proceedings contending that if the surrender of the headlease was ineffective then so too was the surrender of the underlease and the release of the undertenant’s guarantor. The sums in dispute were high and so the case was taken to trial.

The High Court dismissed Deutsche Bank’s claim. It said that the provision releasing the guarantor was unambiguous and meant that the guarantor was released unconditionally from the guarantee. The surrender of the headlease was ineffective as the consent of Co-operative Bank had not been obtained. As the party seeking to obtain the benefit of the surrender of the headlease, it was for Deutsche Bank to ensure that the freeholder was able to accept the surrender.

Matters became worse for Deutsche Bank as the Court further concluded that the surrender of the headlease and the underlease were not dependent on each other. As Deutsche Bank’s interest was not charged it was able to accept the surrender of the underlease independently of the surrender of the headlease

The lesson to be taken from this decision is that the consent of a landlord’s lender is necessary for the effective surrender of a lease. It is the responsibility of the tenant surrendering the lease to examine the landlord’s title and ensure that all consents are in place on completion.