Don't bank on surrendering your lease if the landlord's mortgagee hasn't given its consent
Author: Charlotte Walker and Ed John
Applies to: England and Wales
The High Court has refused to imply into a deed of surrender a condition precedent that the superior landlord had obtained its lender's consent.
In Co-operative Bank Plc v Hayes Freehold Ltd (in liquidation) a deed of surrender had been completed which was intended to collapse an existing lease structure relating to a data centre in Hayes, Middlesex. The deed purported to effect a surrender of a superior lease and an underlease. It also provided for the unconditional and irrevocable release of the undertenant's guarantor.
The freehold title was charged to the Co-operative Bank and so was the underlease. The terms of the charge meant that the Co-operative Bank's consent was needed to any surrender or dealing with the terms of either lease. It complained that it had not consented to the surrenders and so the deed of surrender should be void.
The guarantor argued that while the Co-operative Bank's consent may have been required to the surrenders, its consent was not required to the release of the guarantor. As a result, the release of the guarantor should be effective.
For the head tenant, Deutsche Bank, the outcome looked bleak. If the headlease continued in effect, its liabilities would continue. It had entered into the deed of surrender in order to escape future liability for premises for which it had no further use. To achieve that release, it was prepared to release the undertenant and the undertenant's guarantor - but it had no intention of doing so without securing its own release under the headlease. The rental payments under the underlease reimbursed it for the rental payments it had to make under the headlease.
Deutsche Bank brought interim proceedings contending that if the surrender of the headlease was ineffective, so too was the surrender of the underlease and the release of the undertenant's guarantor. It sought a ruling that it was an implied condition precedent to the release of the guarantor that the surrender of the headlease would be effective, and also that the deed of surrender was void for common mistake.
The court considered that there was merit in both arguments and ordered a full trial of the issue. The latest report on this case is the outcome of that trial.
Decision at trial
The High Court dismissed Deutsche Bank's claim on all counts. In particular it refused to imply a condition precedent into the deed. It said that:
- The provision releasing the guarantor was unambiguous and it plainly meant what it said: that the guarantor had been released unconditionally and irrevocably from its obligations under the guarantee. The implication of the proposed term would be in contradiction of this express term;
- The implied term was not necessary to give the deal business efficacy or commercial coherence. As the party seeking to obtain the benefit of the surrender of the headlease, it was for Deutsche Bank to ensure that the freeholder was able to accept the surrender;
- The surrender of the headlease and the underlease were not dependent on each other. The freeholder's interest was charged and so was the undertenant's but Deutsche Bank's interest was not charged and so it could accept a surrender of the underlease independently of any surrender of the headlease.
Deutsche Bank also failed in its claim to be entitled to rescind the deed and its claim that the deed was void based on arguments of common mistake, fraudulent misrepresentation, unilateral mistake, unjust enrichment and estoppel.
One lesson to be taken from this decision is that the consent of a landlord's lender is necessary for an effective surrender of a lease. This appears to be a point not previously considered by the courts. The text books do not mention the point, and the parties seemed to assume that it represents the law. There did not seem to be any argument on the point.
But the court's decision in relation to the implied term argument should come as no surprise. The Supreme Court emphasised recently - in Marks and Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd  A.C. 742 - that a term will be implied only if it is necessary to give a contract business efficacy or if it is so obvious that it goes without saying, In the view of Henry Carr J, this was not the case here. All parties were represented by solicitors and there was no need for any implied terms.
However the sums in dispute are high and we would not be surprised to hear that Deutsche Bank is seeking leave to appeal.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.