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Landlord's conduct defeats claim for unpaid rent

Published: 14th January 2010

Artworld Financial Corporation v. Safaryan [2009] EWCA, Civ 303

Summary

Landlords beware! While a surrender of a Lease can be agreed between the parties in a formal Deed of Surrender, the courts are willing to infer that a surrender has taken place purely on the basis of the conduct of the parties. The Landlord in this case lost its claim for unpaid rent on the basis that the Landlord's behaviour amounted to a surrender of the Lease, thereby releasing the Tenant from any obligation to pay future rent.

Some law

Lawyers are often instructed to act for a Landlord or Tenant client in agreeing a Deed of Surrender. Once completed, the Deed of Surrender usually releases both parties from any obligation to perform the covenants in the Lease. In the current market, Landlords are unlikely to want to agree surrenders unless they want to take back the premises for their own use or they have another Tenant lined up to take occupation. Even if a Tenant has moved out and / or is insolvent, as long as there is a Lease between the parties, the Tenant is "on the hook" for all of the usual Tenant covenants - e.g. repair, payment of rent and payment of rates. If the Landlord agrees a surrender, the Tenant will be released from those liabilities and the Landlord will need to carry out any necessary repairs, pay rates after the expiry of a void release and will lose the right to sue for unpaid rent.

The courts will hold that a Lease has been surrendered "by operation of law" (i.e. by conduct) where the Landlord's acts are "unequivocally inconsistent" with the continuance of the Lease. The Landlord is, however, entitled to mitigate its loss by, for example, remarketing the Property or carrying out any essential repairs.

Facts

Artworld Financial Corporation was a British Virgin Islands Trust Company, the main beneficiary of which was the Tatanaki Family. Artworld owned a large Victorian house in Holland Park in London. It was described in court as being an "ambassadorial" residence. It comprised five floors of living accommodation, including servants' quarters and a snooker room.

The Tenant entered into a Lease with Artworld for a term of 3 years at a rent of £390,000.00 per year. The Tenant experienced a number of problems with the property, including with the swimming pool and with the heating system. Despite requests to the Landlord to remedy these problems, the Landlord did not carry out any repairs. So with 15 months left to run on the Lease, the Tenant handed back its keys to the Landlord.

The Landlord's response to that was to claim for the rent due up to the end of the term, a sum in the region of £487,000.00 plus interest.

The Tenants successfully defended that claim in the Court of Appeal by claiming that the Landlord's actions amounted to a surrender of the Lease. Those actions were:

1. accepting back the keys to the premises;
2. agreeing a "check out report" and inventory with the Tenant;
3. redecorating the property to the taste of the Tatanaki Family;
4. reinstating some furniture and curtains which the Tenant had asked to be removed at the start of the term;
5. using the driveway for parking its own vehicles;
6. the Landlord's son moving back into the premises for six weeks.

Decision

The Court said that any of these actions on their own would not have been sufficient to have shown a surrender but, taken as a whole, they indicated that a surrender had taken place.

Comment

This case does not decide any new law, but it is a useful reminder to Landlords, particularly in the current market where the bargaining power has shifted back to the Tenant and where there are plenty of vacant retail, office and industrial units.

The Landlord going back into occupation of the Property will almost always result in a surrender of the Property. The courts have reiterated that a Landlord cannot both have the benefit of occupation of the Property itself whilst at the same time claiming rent from a Tenant.

However, as referred to above, the Landlord is entitled to take reasonable responses in the event that a Tenant moves out. Accepting back the keys from the Tenant without prejudice will not constitute a surrender. If it did, the courts have said that the parties would simply engage in a game of ping-pong, with neither party wanting to hold the keys for fear of making an admission as to the existence of the Lease. In addition, the Landlord remarketing the Property or changing the locks in order to secure the premises will not constitute a surrender.

If you would like to discuss any of the issues raised in this article please contact Karl Jackson in our Real Estate department on 0161 214 0500.