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First appeared in Informer: Real Estate Newsletter - Spring 2013
The recent case of Baroque Investments Limited v Richard Heis, Samantha Rae Bewick (as Joint Liquidators of Teathers Limited) has highlighted a little-known risk for a landlord of accepting a surrender during the course of a lease.
The landlord accepted an early surrender from an insolvent tenant in 2009, fully expecting to be able to recover for outstanding repairs and for the costs of reinstatement of the tenant's alterations. The agreement to surrender released each party from all liability for breaches committed after the surrender, but there was no release for breaches committed beforehand.
If the landlord had been asked, he would have said that he understood the surrender date to operate as the equivalent of the expiry of the lease so far as yielding up and reinstatement were concerned.
However, having taken the surrender, the landlord re-let the premises and its claims in the liquidation of the (former) tenant were rejected by the liquidator. The court agreed and rejected the landlord’s claim.
In respect of the reinstatement claims, the judge said that the tenant had an obligation before the end of the lease to reinstate the premises. But that obligation had not been breached at the date of surrender. The term did not expire until 2014 and the licence for alterations gave the tenant the full length of the original term to carry out these works.
On the separate issue of repair, the landlord had quantified the claim as the amount of rent free it had had to give the incoming tenant after the surrender. The judge said this was the wrong approach. The claimable loss for disrepair up to the point of surrender was still capped by section 18 of the Landlord and Tenant Act 1927 as the diminution in the landlord’s reversionary value, which might or might not have been the same (as the costs of the repairs) but which required the valuation of the property in its actual state of repair and its repaired state. The landlord’s valuer had not done this.
The lessons are:
- What are you releasing?
If you are a landlord, think carefully about what claims you might have against a tenant on a surrender of a lease. Aim for a ‘full and final’ surrender agreement, which encompasses all claims. In particular, consider whether you can and should agree liability for repairs/reinstatement/loss of rent before the surrender completes.
- What is the value of your dilapidations claim?
While it may be simpler to presume that the value of a landlord's dilapidations claim is the cost of the works carried out, this is not the correct basis for such a valuation. The landlord's failure to follow the statutory formula meant that the tenant's liquidators were entitled to reject the dilapidations claim.