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Can I give this back, please?

16th October 2017

Can I give this back, please?

The recent High Court decision in Co-operative Bank plc v Hayes Freehold Ltd (In Liquidation and others; Deutsche Bank AG v Sentrum (Hayes) Ltd in Liquidation and another [2017] EWHC 1820 (Ch.), acts as a reminder of the importance of ensuring that you have all the necessary consents from third parties, before entering into a deed to surrender a lease. Andy Creer considers the case and starts with a reminder of some key principles of an express surrender.

Express Surrender

An express surrender is the yielding up of the term to the person entitled to the reversion immediately expectant on the term, so that by mutual agreement the term merges in the reversion.

The reversioner must have legal title to the reversion and be capable of accepting the surrender. A trustee can give or accept a surrender, unless, presumably, the power is restricted by the trust document. Similarly, a freeholder who is subject to a restriction on his power to deal with the registered estate, may not be able to accept a surrender.

Section 52(1) Law of Property Act 1925 states all conveyances of land must be by deed. The surrender must operate with immediate effect, although a contract to surrender can effect a surrender at a future date.

In principle, a surrender can be the subject of a condition precedent, such that the lease is not surrendered if the condition is not met. There is no modern authority on this point, as noted by Woodfall’s Landlord and Tenant.

A surrender can also be the subject of a condition subsequent, whereby non-compliance with the condition results in the revival of the lease such as in the case of Coupland v Maynard (1810) 12 East 134. (I take from this that a modern authority can be 200 years old!).

Every tenant must be a party to the surrender, so a joint tenancy cannot be surrendered by one of two joint tenants such as in the case of Leek and Moorland Building Society v Clark [1952] 2 QB 788 (though this is in contrast to the position where a notice to quit is served as in Hammersmith & Fulham LBC v Monk [1992] 1 AC 478). Executors of a deceased’s estate must also act in concert to effect a valid surrender.

A surrender does not engage a covenant which takes effect “on the termination or sooner determination of the term”.

The surrender of a lease does not operate to extinguish any sub-lease, even if the derivative interest has been granted in breach of covenant: Parker v Jones [1910] 2 KB 32 (again comparing a notice to quit). The surrender of a lease by an assignee does extinguish the liability of the original tenant.

The Case

Judgment was given earlier this summer in respect of Deutsche Bank’s (DB) Part 20 Claim, in which it sought to avoid a deed it had entered into with both its landlord under a headlease (Hayes Freehold) and its tenant under an underlease (Sentrum Hayes).

DB was the lessee of a data centre in Hayes, pursuant to the headlease. The rents received under the underlease mirrored that in the headlease, so DB had no net liability whilst their tenant was solvent.

In August 2015, DB’s landlord and tenant were at the time part of the same group of companies. An agreement was reached with DB whereby all of the obligations under the respective leases would be released, with the collateral objective of releasing the guarantor of the tenant’s obligations under the underlease (Sentrum Holdings Ltd). The obligation to secure the release of the guarantee having been a term of a share sale agreement of Sentrum Holdings.

The difficulties arose because the freehold was charged to the Co-operative Bank PLC. The Co-op’s consent was needed to any surrender or disposal of the leasehold interest over which its charge was secured.

DB had notice of the Co-op charge, as this was admitted by three of their witnesses at trial. Although some of those persons were not directly involved in the negotiation of the deed. However, DB’s solicitors were unaware of the charges, and they (negligently) did not check the freehold title, before advising their client, that the execution of the deed would effect the surrender of the headlease. (I don’t need to emphasise the first moral of the story, do I?).

As the Co-op’s consent was not obtained, the deed could not be an effective express surrender and the arrangement for commutation of the rents failed. This might not have been a problem if Sentrum Hayes had not been in liquidation. Instead, however, if the deed was upheld as a valid release of the guarantee, DB remained liable for the rent and upon the other covenants under the headlease, but without any immediate prospect of covering those liabilities.

As one would expect, DB’s legal team ran every possible cause of action, not least for the purposes of mitigation in the likely professional negligence suit. DB argued:

  • That there was an implied condition precedent to the release of the guarantee, that the surrender of the headlease would be effective.
  • There was an implicit fraudulent misrepresentation, that Hayes Freehold had the power to accept the surrender of the headlease.
  • The deed was voidable for unilateral mistake under the rule in Pitt v Holt [2013] 2 AC 108.
  • The deed was void for common mistake.
  • The guarantor’s unjust enrichment entitled Deutsche Bank to rescission.

The implied condition precedent argument had been successful in the context of an earlier summary judgment application by the guarantor. However, Henry Carr J. dismissed the Part 20 Claim. In his judgment, the implication of the term for which DB contended would contradict an express term of the contract, that is, on execution of the deed DB “unconditionally and irrevocably releases the Tenant and the Tenant’s Guarantor… from all tenant covenants”. (It appeared to be accepted that a condition precedent could apply, notwithstanding the absence of authority.)

The judge noted that there was no inconsistency with the decision on the summary judgment application, as that properly proceeded on the basis that DB’s pleaded case on knowledge was correct, which he had not found as a fact to be the case.

Dealing briefly with the other causes of action:

  • Misrepresentation; the judge held neither Hayes Freehold nor Hayes Sentrum impliedly represented that Hayes Freehold had the power to accept the surrender of the headlease, in circumstances where they put forward a draft deed in the reasonable expectation that DB would take legal advice on it. He also found that, as a matter of fact, at the relevant time DB did not understand the draft deed to making such a representation, so could not have been induced by it or relied upon it. Rather, DB relied upon their solicitors’ advice that the deed would be effective;
  • Pitt v Holt; the judge did not accept that the deed was a voluntary disposition (or gift) whereby rescission for a mistake may be available. DB was released from its obligation as landlord of the underlease;
  • Common mistake; on the basis of the evidence, there was no common assumption that Hayes Freehold had the power to accept the surrender, and this mistake was neither considered fundamental by all the parties nor rendered performance of the contract impossible. Further, on the proper construction of the deed it allocated the risk that the surrender of the headlease might be ineffective to DB;
  • Unjust enrichment; the judge rejected this characterisation of the claim, as DB had expressly contracted to release the guarantee. The doctrine of unjust enrichment was not available to relieve a party from the consequences of its bargain: Swynson Ltd v Lowick Rose LLP [2017] 2 WLR 1161.

The case is interesting because no less than three of Deutsche Bank’s witnesses gave statements which contained inaccurate information about their state of knowledge of the Co-op charges. One of them corrected her statement before confirming its accuracy on oath, with the result that her evidence was the opposite of what the statement had said. The other two had an awkward time in cross examination, when presented with contradictory documents. The judge gave the solicitors an opportunity to file their own witness statement explaining how the Deutsche Bank witnesses came to tender inaccurate statements. Based on the firm’s explanation, the judge was satisfied that the inaccuracy was inadvertent not deliberate. (Second moral of the story – review the disclosure on key points).

It is worth pointing out that the leasehold interest in the underlease was also charged to the Co-op, but here the absence of the Co-op’s consent did not affect the validity of the surrender. This is because the charge on the freehold was a fetter on the headlessee’s power to accept the surrender; whereas, the tenant of the underlease had the power to surrender, but would be in breach of its covenants with the Co-op if it did.

Conclusion

This is a case where the parties to an agreement executed it with the intention of achieving a desired outcome. When the mechanics of the arrangement broke down, one of the parties was left materially disadvantaged, and with its only remedy being against its solicitors. It serves as a stark reminder to all legal representatives acting in the field of commercial Landlord and Tenant.

This article was first published on Practical Law’s Property Blog.

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