Landlords Beware - You Must Terminate any Existing Lease Before Granting a New Lease

A recent case (QFS Scaffolding –v- Sable) relating to a surrender by operation of law serves as a reminder that a new tenancy cannot be granted until the existing lease relating to the premises is terminated. The case also highlights the high threshold required to support a claim that there has been a surrender by operation of law.

Background

The landlord granted a lease of a builder's yard to London Demolition Company Limited which operated two businesses from the yard. LDC ran into financial difficulty and joint administrative receivers were appointed. Prior to that appointment, QFS Scaffolding Limited was formed with a view to taking over one of the businesses and went into occupation of the premises. The landlord and QFS began negotiations for a new lease but were unable to agree so no new lease was granted. QFS subsequently approached the receivers of LDC who purported to assign the lease to QFS.

Appeal decision

The matter came before the Court of Appeal who held that for there to be a surrender by operation of law there had to have been conduct by the landlord or the tenant that was unequivocally inconsistent with the continuation of the lease. Such conduct had not been demonstrated here even though LDC (acting via the receivers) had vacated the premises, left behind a third party in occupation and not paid any rent or acknowledged any liability to pay rent. The receivers' were aware of the new lease negotiations but their position was "one of inactivity and lack of involvement".

The landlord had spent considerable time negotiating a new lease but failed to deal with the termination of the existing lease either by surrender or forfeiture. During this period of the lease negotiation, the landlord drew on the rent deposit provided by LDC which the Court highlighted was not an act inconsistent with the continuation of the lease.

Consequences

The case demonstrates that when it comes to surrender by operation of law, conduct of the...