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23 August 2017

The importance of carrying out a title investigation before entering into a deed of surrender

The recent case of The Co-operative Bank plc v Hayes Freehold Limited and Others (2017) raised an interesting issue concerning the effect of a purported surrender of two leases. The landlord had failed to obtain the consent of a bank, which had a charge over the property, before effecting the disposition of the leases.

Facts

A deed of surrender was completed for a data centre in Hayes purporting to affect a surrender of a superior lease, an underlease and an unconditional and irrevocable release of the undertenant’s guarantor.

However, it transpired that the freehold title was subject to a mortgage, in favour of the Co-operative Bank.  Under the charge, the bank’s consent was required to the surrender of the superior lease but such consent had not been obtained.  Therefore, the bank issued proceedings, seeking a declaration that the deed of surrender was void, or should be set aside.

The court proceeded on the basis that the surrender of the superior lease was ineffective and the tenant was not released from its liabilities under it.  The issue that the tenant faced was that if the superior lease continued, in effect it would continue to be liable under the superior lease for premises for which it had no further use.

The tenant issued interim proceedings, arguing that if the surrender of the superior lease was ineffective, the surrender of the underlease and the release of the undertenant’s guarantor were also ineffective.  The tenant sought a ruling that it was an implied condition precedent to the release of the guarantor, that the surrender of the superior lease would also be effective and that the superior landlord had obtained its mortgagee’s consent.

Decision

The High Court held that it could not imply a condition precedent into a deed of surrender, that a Superior Landlord had obtained its mortgagee’s consent, on the basis that:

  1. The express clause releasing the guarantor from its liability was unambiguous; it meant what it said that the guarantor would be released from its obligations under the guarantee and implying a term would mean that the clause would need to be re-written in a way that was inconsistent with the express term;
  2. The surrender of the superior lease and the surrender of the underlease were not dependent on each other; the surrender of the underlease could take effect, even where the surrender of the superior lease could not;
  3. It was the tenant’s responsibility to ensure that the superior landlord was able to accept such surrender, as the party seeking to obtain the benefit of the surrender of the superior lease; and
  4. The implied term was not necessary to give the deal business efficacy or commercial coherence.

The claims by the tenant of fraudulent misrepresentation, common mistake, unilateral mistake in a voluntary disposition and unjust enrichment were also dismissed on the facts.

Practice point

This case serves a stark warning to tenants and their legal advisers acting on a surrender.  It reiterates that failure to obtain the requisite consent from the landlord’s mortgagee could result in the surrender being ineffective and a tenant being left with ongoing liabilities, including a continuing obligation to pay rent and perform the other tenant covenants in a lease.

Before completing a surrender, a tenant must:

  1. Ensure that the landlord’s title is investigated, to ascertain whether it is subject to a mortgage and whether any third party consents are required;
  2. If so, raise enquiries of the landlord’s solicitors to establish whether mortgagee’s consent is required; and
  3. Procure the mortgagee’s consent to the surrender before completion of the deed of surrender.

In this case, the tenant’s solicitors had failed to undertake a title investigation before the deed of surrender had been completed.  If they had done so, this would have revealed the charge on the freehold title.

For further advice on the issues raised in this article, or for assistance on any commercial property matter, please contact Michael Fahy or Lisha Gorsia.

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