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Break notices and surrender

Break notices and surrender

Service at “place of abode” and a reminder of the principles relating to surrender by operation of law.

In the case of Frederick-Levett-Dunn (1) Howard Evans (2) Barnett Waddingham Trustees Ltd (3) v NHS Property Services Ltd [2016] EWHC 943 (CH), the High Court in Birmingham considered whether a tenant had successfully broken its leases, and, if it had not, whether, in any event, the landlord had accepted surrenders by operation of law.

The leases were materially identical, relating to three floors of a building known as Coniston House, for a term of ten years from 11 July 2010 with a combined rent exceeding £200,000.

The landlord was described in the leases as:

“Frederick Levett-Dunn, Simon Levett-Dunn, Howard Evans and Barnett Waddingham Trustees Ltd, all of 75 Tyburn Rd Erdington Birmingham B24 8NB (hereinafter called “the Landlord” which expression shall where the context so admits include the person or persons for the time being entitled to the reversion of the premises hereby demised immediately expectant on the term hereby granted)…”

The break clause in the leases provided as follows:

“If the Tenant wishes to determine this lease at the end of the third, sixth or ninth year of the Term and gives the Landlord not less than six months prior written notice of that wish… then on expiry of the said notice (“the Break Date”) the Term will cease and determine…”.

The clause in the leases relating to service of notices provided that:

“For the purpose of service of all notices hereby or by statute authorised to be served the regulations as to service of notices contained in section 196 of the Law of Property Act 1925… shall be deemed to be incorporated herein but service on any one of the parties comprising the Landlord shall be deemed to be service on all and notices to be served on the Tenant are to be sent to the Director of Facilities at Coniston House…or such other address as the Tenant shall notify to the Landlord in writing.”

Section 196 provides:

“196 Regulations respecting notices
…(3) Any notice required or authorised by this Act to be served shall be sufficiently served if it is left at the last-known place of abode or business in the United Kingdom of the lessee, lessor, mortgagee, mortgagor, or other person to be served…
(4) Any notice required or authorised by this Act to be served shall also be sufficiently served, if it is sent by post in a registered letter addressed to the lessee, lessor, mortgagee, mortgagor, or other person to be served, by name, at the aforesaid place of abode or business…”

Despite the fact that the tenant had sent four separate notices, one addressed to each party named as landlord, by recorded delivery within the six month time limit, the landlord denied that the notices had been effectively served. Their argument was that the address given in the lease of 75 Tyburn Road was not, in fact, the place of abode or business of any of the individuals named as landlord. The recorded delivery letter had been signed for in the name of Howard Evans but it was denied that Mr Evans had, in fact, himself signed for the letter. Furthermore, the notices did not come to their attention until after the relevant deadline has passed.

The break notice issue

The landlord provided evidence that the address given was no longer used by the landlord for its business. This argument was given fairly short shrift by the court. The court’s view was that “place of abode” had, in earlier cases, been applied quite widely. For example, it had been interpreted to include not only a residence but also a business address. Equally, there were a wide range of circumstances in which an address may be considered to be a place of business. So, for example, a person may have more than one place of business. Further, and importantly, if a person describes an address as their place of abode or business, the person receiving that information should not have to look behind that statement to check if it is correct.

Here, the landlord had not updated the tenant with a new address. The address remained an “abode or place of business” because the landlord had nominated it as such, and remained so until the landlord nominates some other address or, perhaps, the tenant acquires actual knowledge that it cannot be an address at which the landlord can be reached (for example, if the premises have been destroyed or have become occupied by someone else). For those reasons, the argument that the break notices had not been successfully served failed.

The surrender by operation of law issue

The tenant held the surrender argument in reserve, in case its primary argument relating to service of the break notices failed. The judge considered it in any event.

Once it had become known that the parties were in dispute, the landlord had written to the tenant as follows:

“You will be aware of our client’s contention that the notices served on your behalf were ineffective and that as a consequence the three leases remain in being and you will have a continuing liability to pay rent and to fulfil the other obligations under those leases.
Without prejudice to that contention and to the continued existence of the leases our clients recognise that it is in the interests of all concerned that the premises are properly secured… Accordingly, we are prepared to accept the keys back from you purely for the purpose of enabling the premises to be secured. The acceptance of the keys is not to be taken either as an acknowledgement that the notices purporting to activate the break clauses were effective to do so or as an acceptance of a surrender of the leases… If at any stage your client wishes to re-enter the premises then arrangements will forthwith be put in hand to return the keys to your clients and to take any other steps needed to enable such re-entry.”

That letter had been written to make it clear that the landlord, by accepting back the keys in these circumstances, was not accepting a surrender of the leases. However, after that letter, various steps were taken by the landlord which, on the tenant’s case, were inconsistent with that proposition.

The steps that the tenant highlighted to the court as amounting to an acceptance of a surrender related, firstly, to the handing back of the keys itself, secondly to the fact that the landlord had taken on responsibility for utilities and, thirdly, to the fact that the landlord had gone on to re-market, agree heads of terms and then grant a new lease to a third party.

The court reviewed the authorities relating to surrender by operation of law. This had been set out by a judge in an earlier case and endorsed by the Court of Appeal in Artworld Financial Corporation v Safaryan (2009) EWCA Civ 303.

“[28]… The meaning of the doctrine of surrender by operation of law is not in doubt. It was well summarised by Peter Gibson LJ in Bellcourt Estates v Adesina [2005] EWCA Civ 208, [2005] 18 EG 150, [2005] 2 EGLR 33, in these terms:

“The doctrine of surrender by operation of law is founded on the principle of estoppel, in that the parties must have acted towards each other in a way which is inconsistent with the continuation of the tenancy. That imposes a high threshold which must be crossed if the tenant is to be held to have surrendered and the landlord is to be held to have accepted the surrender.”

[29] In my judgment the propositions derived by the judge from the authorities and stated in para 68 of her judgment are correct:
‘(1) The issue of whether there has been a surrender by operation of law after a tenant’s abandonment of the leased premises must be determined by evaluating the effect of the landlord’s conduct as a whole (cf London Borough of Brent v Sharma (1992) 25 HLR 257 at 259). I accept Mr Kremen’s argument that the totality of such acts can amount to a resumption of possession even though individual acts might each be only equivocal. With this in mind –
(2) The test is whether the landlord’s conduct is ‘so’ inconsistent (Oastler v Henderson 1877 2 QBD 575 at 577) with the continuation of the tenant’s lease that it could only be justified as being lawful on the basis that the landlord has accepted the tenant’s implied offer to give back possession, and has taken possession of the premises beneficially for himself.
(3) Accepting back the keys without more will always be equivocal. As a matter of practicality and common sense, one party has to hold the keys to prevent an absurd situation in which they are passed back and forth because neither party wants to risk it being suggested that it has made an admission by holding them.
(4) Any act of the landlord which is consistent with its rights under the lease, such as entering the premises to inspect or to repair them, will not in itself give rise to a surrender because, by definition, it is not inconsistent with the lease continuing.
(5) Any further act of the landlord which amounts to protecting or preserving the property, such as taking security measures or doing necessary repairs, will not in itself give rise to a surrender because such self-help, necessary to preserve the landlord’s interest in the value of his property, is a reasonable response to the tenant’s evinced intention not to perform the obligations of the tenancy: cf McDougall’s Catering Foods Ltd v BSE Trading Ltd 1998 P & CR 312; Relvok Properties Ltd v Dixon (1972) 25 P & CR 1, at p 7.
(6) Similarly, any act of the landlord which amounts to the landlord’s performing the tenant’s covenants under the lease, such as keeping the garden tidy, would not necessarily amount to a resumption of possession as it is not inconsistent with holding the defaulting tenant to performing the lease.
(7) Any further act of the landlord referable to the landlord’s seeking to re-let the premises will not necessarily give rise to a surrender by operation of law, as it is no more than what the landlord might reasonably be expected to do in the circumstance for the potential benefit of all parties: Oastler v Henderson (above). The landlord must be entitled to seek to mitigate the damage caused in reality (even if not yet technically in law so long as the lease remains extant) by the tenant’s abandoning the lease, by seeking to obtain another tenant, without thereby losing his rights against the original tenant if he is unable to do so.
(8) However, if the landlord goes further and uses the premises for his own benefit beyond the totally trivial – and certainly, in my judgment, if such use amounts to occupation of the premises – then he re-takes possession of the premises inconsistently with the continuance of the lease. This will give rise to a surrender by operation of law, since it is only on the basis of having accepted such a surrender that the landlord’s acts would be lawful.’ “

In light of the above summary of the relevant principles, the judge found that the acceptance of the keys by the landlord was an equivocal act and had been made strictly without prejudice. Equally, the taking on of responsibility for utility bills, looked at alone, might have amounted to an acceptance that the leases were at an end. Here, though, again, that act had to be looked at within the context of the without prejudice regime that had been established. Accordingly, the taking on of responsibility for utilities was not, in this particular case, an unequivocal act valid only on the footing that the leases were at an end.

The judge then considered the position regarding the marketing of the premises for re-letting, the agreement of heads of terms and the completion of a new lease to a third party. As for the marketing and agreement of heads of terms, again, these were equivocal acts. The landlord had a duty to mitigate its loss by seeking a new tenant, but could have withdrawn from that process, even after agreeing heads of terms, and insisted that the leases were continuing.

The same could not, however, be said for the landlord’s act of taking back possession and granting of a new lease to a third party. This could not have been done while the leases were still subsisting and was therefore an unequivocal act of acceptance and recognition that they were not.

The overall outcome therefore was that the court accepted that the tenant had validly exercised its break rights but, even if it had not done so, the court found that the leases would have come to an end in any event, by way of surrender, on the date that the landlord had granted a lease to the third party.

William Lawrence