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Surrender and re-grant

When does a Lease Variation Operate as a Surrender and Re-Grant?

By Janet Bignell, barrister and Peta Dollar
July 2006

Although it is generally known that a variation to a lease, which causes an extension to the term or an enlargement of the demised area, will give rise to a surrender and re-grant by operation of law, the position is not so clear in relation to lease variations which reduce the length of the lease term or the size of the demised area. Questions regularly arise in practice and this article reviews the conflicting authorities and suggest a solution to the issues.

What is a lease?

A lease is both one of the only two estates in land which can exist in law and also a contract for the possession of land for a definite period. As stated in Elements of Land Law by Gray and Gray, 4th Edition, "There is an essential ambiguity in the leasehold device as both contract and property"; and as Lord Templeman said in the case of Prudential Assurance Co Limited v London Residuary Body [1992] 2 AC 386, "[a] demise for years is a contract for the exclusive possession and profit of land for some determinate period".

There are at least two required elements for a lease, namely:
  • the tenant must be granted exclusive possession of the property.
  • for a fixed or periodic term certain.
It may be that there is in addition a third required element, at least in respect of a periodic tenancy, namely a rent or other consideration payable by the tenant, but the requirement for this has become less certain: see the cases of Ashburn Anstalt v Arnold [1989] Ch 1 and Antoniades v Villiers [1990] 1 AC 417.

How is a lease brought to an end?

Every lease will end by effluxion of time, unless it is either prematurely determined or continued by virtue of the provisions of the Landlord and Tenant Act 1954 or some similar statutory provision. There are many different ways to determine a lease prematurely, including:
  • exercise of a break option
  • service of a notice to quit
  • forfeiture
  • disclaimer on behalf of an insolvent party
  • merger or enlargement
  • termination on statutory grounds
  • surrender.

What is the nature of a surrender?

A surrender involves:
  • the yielding up of the lease by the tenant to his immediate landlord
  • with the consent of the immediate landlord
  • during the original term of the lease or any statutory continuation
and results in the absorption (per Lord Millett in Barrett v Morgan [2002] 2 AC 264) of the tenant's leasehold interest in the landlord's reversion such that the lease is extinguished by operation of law (see Allen v Rochdale BC [2000] Ch 221).

The surrender operates solely between the tenant and his immediate landlord, and has no effect on any sub-lease or superior interest. Surrender may be either express or implied by operation of law.

Surrender by operation of law

The basis of surrender by operation of law is estoppel, that is, where the tenant deliberately does some act which is inconsistent with the continuation of the tenancy, and the landlord concurs or acquiesces, it would be inequitable for the parties to rely on the argument that there had been no surrender by deed in order to assert that the term of the lease was still continuing. Surrender by operation of law will take place irrespective of the (actual) intentions of the parties and despite the absence of any form of documentation. In particular, an unequivocal act is required, an agreement between the parties is not sufficient to cause a surrender by operation of law. There is no requirement for the tenant actually to deliver up the premises, but if there is no actual handing over of possession (e.g. by giving the keys to the landlord) then the giving up of possession must be able to be implied from the conduct of the tenant, which must be inconsistent with the tenancy continuing. Similarly, the landlord must either accept delivery of the premise or act in such a way that it is inconsistent with the tenancy continuing.

Conduct giving rise to surrender by operation of law

It is established that the following acts will definitely give rise to a surrender by operation of law:
  • the tenant vacating the premises and handing back the keys to the landlord, who accepts them unconditionally and not by mistake;
  • the grant by the landlord and the acceptance by the tenant of a new lease of the premises, provided that:
    • it is a valid lease,
    • it commences during the term of the old lease, and
    • it is not granted subject to the old lease
  • the variation of the lease by the increase of the premises demised (see Jenkin R. Lewis & Son Limited v Kerman [1971] Ch 477) or the increase in the length of the contractual term (see In Re Savile Settled Estates [1931] 2 Ch 210)
  • the variation of the lease by the insertion of a tenant's option to extend the original contractual lease term (see Baker v. Merckel [1960] 1 QB 657).
Buckley J. explained the reasoning behind the second, third and fourth cases mentioned above, when he said in Jenkin R. Lewis & Son Limited v. Kerman, "This does not depend on the intention of the parties but upon the impossibility of the two demises co-existing".

So if a variation which alters the term of the lease or the premises demised by it so as to increase them gives rise to a surrender and re-grant by operation of law, what effect does a variation have which reduces the term or the extent of the demised premises? Can other variations of a lease give rise to an implied surrender and re-grant on the same principle?

Reducing the extent of the demised premises

The extent of the premises demised by a lease may be reduced in two distinct ways; first, by the parties entering into a surrender of part of the premises, and secondly, by the parties varying the demise by a deed of variation. There is no doubt that a surrender of part, whether or not accompanied by a consequential reduction in the rent, will not give rise to an implied surrender of the whole lease and grant of a new lease of the retained portion; the whole doctrine of implied surrender and re-grant is founded in the essential inconsistency between the intended variation and the continuance of the original lease, and there is no inconsistency between a surrender of part and the continuance of the original lease, albeit without the part which has been surrendered.

It has been suggested that Paragraph 17.026 of the current edition of Woodfall, which states that "if [a] reduction in rent is accompanied by giving up possession of part of the property a surrender and re-grant may be inferred", citing the case of Jones v. Bridgman (1878) 39 LT 500, is authority for the proposition that a surrender of part can give rise to an implied surrender and re-grant. However, this paragraph is in fact dealing with the variation of an existing lease causing a reduction in the demise, and surrenders of part are dealt with later, in paragraph 17.032, which states categorically "A surrender of part does not operate as the grant of a new tenancy."

There is a brief statement to the contrary in one case; in the case of In Re Savile Settled Estates, Maugham J. expressed the view, albeit obiter, that a "giving up" of part coupled with a reduction in the rental payable in respect of the remainder of the demised premises could cause a surrender by operation of law. However, Buckley J. at first instance in Jenkin R. Lewis & Son Limited v. Kerman stated "If a landlord, A, leases to a tenant, B, 100 acres for a term of 10 years at a rent of £100 per annum, B could, it seems to me, surrender 10 of the 100 acres to A without any disturbance of his tenure under the lease of the remaining 90 acres .. The circumstances would not be such as necessarily to involve a new grant. Similarly, A could release B from £10 per annum of the rent without any disturbance of the parties' subsisting relationship as landlord and tenant. If B surrenders 10 acres and A releases £10 per annum rent at one and the same time, this would not, I think, necessarily involve a surrender and re-grant in relation to the rest of the land ... But in any of these cases, the change could be carried out by a surrender and re-grant and, if carried out in circumstances and in a manner indicating an intention to create a new tenancy, will result in a surrender by operation of law of the old one." Buckley J's comments clearly show the distinction between a surrender of part and a variation which causes a reduction in the demise (he referred to the case of Holme v. Brunskill (1878) QBD 495, where the jury decided that the surrender of part of the demise and the consequential reduction in the rent did not cause a surrender and re-grant.).

When Jenkin R. Lewis & Son Limited v. Kerman went to the Court of Appeal, Russell LJ, giving the judgment of the Court, stated: "The fact that from this estate parcels had been surrendered and rent accordingly reduced appears to us entirely consistent with a preservation of the situation as it then was, and in no way inconsistent with a continuance of the original contract of tenancy."

But what is the position in relation to a variation (not a surrender of part) which causes a reduction in the demise, whether or not accompanied by a reduction in the rent?

It is clear that a variation to a lease which causes a reduction in the rent without a consequential reduction in the demise does not operate as a surrender and re-grant (see paragraph 17.026 of the current edition of Woodfall). However, there are two cases which suggest that where the reduction in the demise is accompanied by a reduction in the rent, a surrender and re-grant may be inferred.

In the old case of Jones v. Bridgman, dealing with distress, the jury had found that a new tenancy had been constituted between the parties as a result of the tenant giving up possession of some of the demised premises and paying a reduced rent, and on appeal, the court decided that the jury was entitled to make this finding. However, the point is not dealt with at any length in the judgments, and there are some inconsistencies in the judgments. There is also the obiter statement of Maugham J. in Re Savile Settled Estates which is referred to above. But there are no recent cases on the point.

It should be noted that when the above cases were determined, the payment of rent was a specific requirement for a lease to exist, and accordingly the court paid particular regard to the fact that the rent was being reduced on a surrender of part. It is possible that the court would pay less regard to the issue of rent reduction if a case were to be decided today, in the light of cases such as Ashburn Anstalt v. Arnold and Antoniades v. Villiers, which held that rent was not an essential requirement for a lease to exist.

Additionally, it is the very nature of estoppel that each case will be decided on its own facts and, because the implication of surrender and fresh grant "is a fiction based on estoppel .. it is not to be encouraged or extended" (Per Pearce LJ in Baker v. Merckel [1960] 1 QB 657). Accordingly it is likely that, if a case were to come before the Courts today where the demise was reduced by way of a deed of variation or where no documentation was entered into, the intention of the parties would be classified as a surrender of part, and accordingly there would be no suggestion that a surrender of whole and fresh grant had taken place.

Variation causing a reduction in the term

The most natural way to cause a reduction in the term of a lease is by a surrender of that lease or, if the term is to continue for a period of time before ending prematurely, by an agreement for the surrender of that lease at some future specified date. The former will cause an immediate surrender of the lease with no re-grant; the latter will not give rise to an immediate surrender and re-grant, which would be "perverse", according to Russell L.J. in Joseph v. Joseph [1966] 3 All ER 486.

The effect of other variations

In the Court of Appeal case of Friend's Provident Life Office v British Railways Board [1996] 1 All ER 336, the rent was changed and covenants relating to alterations were introduced, but no surrender and re-grant was held to have taken place. Indeed, the only lease variations which would give rise to a surrender and re-grant, according to all three of the judges, are "an increase in the extent of the premises demised or of the term for which they are to be held, both of which would change the legal estate". Beldam L.J. said "I can see no reason why [the parties] could not achieve the changes they desired in the terms of the lease without the law implied its surrender and a re-grant for the remainder of the term of the lease."

Problems with surrender by operation of law

The consequences of a surrender and re-grant can be costly for both landlord and tenant. So far as the landlord is concerned, where the original lease was an "old" lease under the Landlord and Tenant (Covenants) Act 1995, the new lease will be a "new" lease, because it will have been granted after 1 January 1996. Accordingly, where the landlord had retained privity of contract with the original tenant (and, subject to the terms of the relevant licence to assign, with each subsequent tenant), and was entitled to sue not only the current tenant but also his predecessors in case of a breach of the tenant's covenants, the automatic surrender and re-grant will mean that in future, the landlord can only look to the current tenant for performance of the tenant's covenants. Where the original tenant was an excellent covenant, and the current one is significantly less good, the cost to the landlord of a minor extension of the demise will be high.

But the landlord is not the only party who may be adversely affected by a surrender and re-grant. Where an "old" lease becomes a "new" lease, the current tenant may be adversely affected in that the landlord, who had been relying primarily on the original tenant's covenant (if it was a particularly strong one), may become much less keen to consent to an assignment of the lease in the future. More seriously for the tenant, he will have to pay Stamp Duty Land Tax on the new lease - and where the original lease fell within the Stamp Duty regime, he will not even get credit for the Stamp Duty which he paid on the original lease against the SDLT payable on the new one

Janet Bignell and Peta Dollar

(This article was first published in the Landlord and Tenant Review)

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