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Lease surrender turns sour
Real Insights - Property Update

Real Insights - Property UpdateIssue 21 | September 2017

Date
05 September 2017

Joanna Lampert Partner

Michael Clarke Associate

In the recent case of Co-operative Bank Plc v Hayes Freehold Limited, a tenant surrendered its lease without checking whether the landlord had mortgaged the freehold.


Lease surrender turns sour

In the recent case of Co-operative Bank Plc v Hayes Freehold Limited, a tenant surrendered its lease without checking whether the landlord had mortgaged the freehold. The surrender was void, with unfortunate consequences.

The dispute concerned commercial premises in west London. Hayes Freehold Limited was the freeholder and Deutsche Bank was the head tenant. Deutsche had sub-let the premises to a weak covenant whose obligations were guaranteed by Sentrum Holdings Limited. The freehold was charged to the Co-operative Bank.

In August 2015 the parties entered into a deed to surrender the headlease and the sublease, and to release the sub-lease guarantor. Crucially, bank consent was required for the headlease surrender, but this consent was not obtained before the deed was completed.

Deutsche's solicitors did not check the freehold title before completion of the deed, and therefore were unaware of the Co-operative charge. Despite this, Deutsche's solicitors reassured Deutsche that the headlease surrender would take effect, and Deutsche relied on this.

In reality, the failure to obtain bank consent meant that the surrender of the headlease did not take effect.  Deutsche were left on the hook for the remainder of the headlease term with an annual rent of over £2.6 million.

In contrast, the sub-lease surrender had taken effect, and the sub-tenant's guarantor had been released. Now left with a lease it did not want and without a guarantor, Deutsche ran various arguments in an attempt to convince the High Court that the sub-lease and its guarantee remained on foot.

Deutsche suggested there was an implied condition precedent that the sub-lease would not be surrendered unless the headlease was also surrendered.  The court rejected this.  The judge decided such a condition was not necessary to give the deed business efficacy, and therefore could not say that it must have been the parties' intention.

Deutsche also claimed the freeholder and sub-tenant had impliedly made a fraudulent representation that the headlease surrender would take effect, when they knew in reality it would not due to lack of bank consent. The judge also rejected this argument as he did not consider the representation had been made or relied upon. He said Deutsche had relied on the advice of its solicitors, not on the actions of the other parties.

Deutsche's third and fourth arguments were based on the notion that the deed was void (or voidable) due to a mistake as to its legal effect. This also failed.

Deutsche's final argument was that the guarantor had been unjustly enriched by its release from its obligations.  The judge dismissed this, saying that unjust enrichment cannot be relied upon simply to get out of a bad bargain.

Property investors and professional advisers are familiar with the need for due diligence.  The case is a stark reminder that this includes checking your landlord's title before surrendering your lease.  Failure to do so may give some parties an easy escape from their obligations, whilst others are left with vast rent commitments for sites they no longer want or need.