Lease surrenders - unexpected consequences where no clean break

In this case, the parties agreed the surrender of a lease. The deed of surrender gave a release in respect of rights and obligations on or after the date of the surrender but preserved the right of either party to pursue a claim in respect of any earlier breach. Two areas of dispute then arose.

Firstly, the landlord claimed that the tenant had failed to comply with an obligation to carry out certain reinstatement works. Under the terms of a licence for alterations, the tenant was bound to carry out these works “before the end of the lease”. Both parties agreed that the obligation existed and there was no disagreement that the reinstatement works had not been carried out. The critical issue was when a breach of this obligation arose. Was it before the lease expired? Or was it only after termination when the property was handed back in its non-compliant condition?

The court preferred the argument advanced by the tenant. Had there been no surrender, there would only have been a breach once the lease expired without the reinstatement works being carried out. As rights and obligations arising on or after the date of surrender had been released, the surrender had effectively removed any right of action the landlord might have had.

The second limb to the landlord’s action was a claim for damages. Following the surrender, the landlord had immediately re-let the property but at a reduced rent and with the benefit of a significant rent free period which the new tenant had been able to negotiate on account of the state of repair of the property. On this point the landlord was on more solid ground one might have thought as there was no disagreement that the property was in a poor state of repair and clearly this was as a result of breaches occurring before the date of the surrender. Indeed there seemed also to be no doubt that the landlord had taken reasonable steps to mitigate his loss. However, the landlord attempted to base his losses on the value of the discounts the landlord had given to the new tenant (the rent free period and the reduction in rent).

Legally, s18(1) Landlord and Tenant Act 1927 limits the measure of damages available to a landlord for breach of the obligation to repair. The limit is the difference in value between the landlord’s interest in the property in repair as compared with its value in its unrepaired state (the “diminution in value”). The landlord in assessing the value of its claim was not entitled to take into account any loss of rent, but should have confined itself to assessing the diminution in value. While the door was left open for the landlord to make a properly assessed claim, Baroque’s claim for over £1.2 million was dismissed.

Ideally, landlords and tenants will achieve a clean break at a surrender date with the tenant being given a full release subject to dealing with liabilities such as reinstatement and dilapidations at the completion of the surrender. If a clean break cannot be achieved then the parties need to be aware of the potential issues that might arise from the terms of the agreed release provisions.

Baroque Investments Limited v Heis and Bewick (2012)