Contributors
The recent case of Dreams Limited -v- Pavilion Property Trustees Limited (May 2020) provides important lessons for landlords and tenants who have agreed a surrender of a lease. The principal issue in the case was whether, the tenant having agreed the surrender would be with vacant possession (VP), the landlord could refuse to accept the surrender unless and until VP had been given.
The Court's conclusion that the landlord did not have to accept the surrender until VP was given could have repercussions for any agreement to surrender.
The case also concerned the effect of an express condition precedent of the surrender agreement that the Tenant should pay "all money due". Did that impose an obligation on the tenant to settle a dilapidations claim before the surrender date in order for the surrender to proceed?
Brief background facts
The tenant (Dreams) and the landlord (Pavilion) entered into an agreement for surrender (AFS) of the tenant's lease, exercisable upon six months' written notice by the tenant.
Importantly, the AFS incorporated the Standard Commercial Property Conditions that are normally used upon a sale of an interest in land.
The three key terms of the AFS were:
- Clause 6.2: "it is a condition of completion that the tenant is to pay any money due on completion"
- Clause 8: "The surrender is with vacant possession"
- Clause 11.1.8 , which provided for the release of the tenant absolutely from its liabilities covenants and obligations under the lease, upon the surrender completing.
Notice exercising the surrender right was served by the tenant and the landlord then served a Schedule of Dilapidations. The tenant failed to remove a mezzanine floor and a lift which had been installed by a previous tenant. An issue arose as to whether those items needed to be removed for VP to be given up. That issue remained unresolved.
In the run up to completion, the landlord claimed that the tenant needed to pay the sum of £173,000 as claimed in the Schedule of Dilapidations in order to satisfy the condition at clause 6.2. The tenant countered that as the dilapidations claim had not been settled, there was no current sum due and indeed, upon surrender, clause 11.1.8 released the Tenant from its dilapidations liabilities completely.
Clearly not wanting to lose its dilapidations claim under clause 11.1.8 if the surrender took place, the landlord then claimed that the tenant could not force through the surrender as the surrender was strictly conditional upon VP being given up.
The Court's decision
Unsurprisingly, the Court was not persuaded that an unresolved dilapidations claim fell within the meaning of "any money due", payment of any such "money due" being an express condition of the surrender completing. As is common with most dilapidation claims, by lease expiry the precise sum due from the Tenant was far from being resolved and so it was not possible to say that any set sum of money was definitely due at that point. The Judge was unimpressed by suggestions from the landlord's counsel that the six month surrender notice period should have been enough for the tenant to establish its dilapidations liability, the court noting that dilapidations claims often ran on for far longer than that. It was not for the tenant to somehow estimate its own dilapidations liability and make a payment to the landlord not really knowing whether that payment was the correct sum.
Accordingly, the surrender could go ahead without the dilapidations claim having been paid off and (most unfortunately for the landlord) its dilapidations claim would fall away under the provisions of clause 11.1.8 when the surrender did complete. That clause seems to have been a somewhat unfortunate form of wording for the landlord to have agreed, but the Court was not prepared to take that fact into account when reaching its conclusion.
That left the issue as to whether the landlord, by relying on clause 8, could refuse to complete the surrender if VP had not been given up. The tenant pointed out that, unlike clause 6.2, clause 8 did not expressly stipulate that the surrender was conditional upon VP being provided. Thus, the tenant argued, surrender could and should take place even if VP had not been provided, and the landlord's remedy would be to claim damages from the tenant for failure to provide VP.
The Court was not persuaded by this. Rather, the Court noted that the parties had deliberately agreed to structure the transaction as a sale of land incorporating the Standard Conditions. The Court decided that on any sale of land, where the parties had agreed that VP would be provided, the buyer/landlord could refuse to complete unless and until VP was provided.
That was not to say that if VP was not provided on the day of completion the whole agreement for surrender would fall away. Rather, there was simply no obligation to complete immediately until VP was given up.
Thus, although whenever completion takes place the landlord will apparently lose its sizable dilapidations claim, nonetheless the landlord can refuse to complete unless and until VP is provided. That will mean that the whole issue as to whether the lift and the mezzanine need be taken out to provide VP will form an important further dispute between the parties yet to be resolved.
Comment
This case cannot be regarded as satisfactory for either party. It thus contains significant warnings for parties entering into agreements for surrender to be very careful as to how those agreements are worded.
Although the case is not likely to affect lease break rights that are conditional upon VP (these were expressly contrasted in the case with an agreement to surrender with VP) nonetheless parties involved in an early lease termination will need to bear carefully in mind:
- the extent to which VP needs to be provided and, if so, whether any agreed surrender can still take place if VP is not provided on the completion date.
- what claims are to be settled as part of any release of tenant liabilities upon surrender, as there is a need to ensure that any sweeping release of such lease obligations does not unwittingly catch liabilities that the landlord may want to remain after surrender.
- the mere service of a Schedule of Dilapidations with a quantified demand setting out what the landlord considers the tenant should pay does not mean that the tenant owes that precise sum upon completion; rather the liability remains contingent and will not be caught by any condition that the tenant must pay "any money due" upon completion.
- accordingly, if a tenant's general liabilities under the lease are to be released upon surrender, the landlord must take care specifically to carve out any dilapidations liability unresolved at surrender if it is to survive the surrender taking place.
For more information, please get in touch.
