Surrender by operation of law: conduct of parties inconsistent with the continuance of the tenancy

In Brent LBC v Sharma ([1992] WL 893783, CA (Eng)) a tenant served notice on her landlord to say that she had moved out and that she would not object if her co-habitee were granted a lease of the property. The landlord stopped charging rent and internal documents showed that it regarded the lease as having come to an end. Subsequently, it served a notice to quit on her at the property. The question was whether there had been surrender by operation of law and the English Court of Appeal found that there had been.

‘In my judgment, the court is entitled to look at the whole of the conduct of the landlord prior to the issue of proceedings. If, by the time of the issue of the proceedings, it is quite plain that the landlord has accepted by his conduct, or shown by his conduct, that the tenancy no longer existed, then the conditions giving rise to a surrender by operation of law are established.’    (Stuart-Smith L.J)

The tenant regarded the tenancy as being at an end from the date of her notice to the landlord. The landlord’s subsequent conduct showed that it too regarded the tenancy as being at an end. Its later notice to quit did not prejudice this conclusion; it was just a belt and braces effort by the Council.

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Surrender by operation of law is based on estoppel

In Nickells v Atherstone ((1847) 10 Q.B.R. 944; 116 ER 358) A was the tenant under a three year lease. He  moved his belongings out of the property during the lease term and asked the landlord to find a new tenant. The landlord did so but the new tenant became insolvent. The landlord then brought an action against A for the rent payable after the new tenant stopped paying rent. This action failed on the basis that re-letting the property with A’s consent gave rise to a surrender by operation of law.

Denman CJ said that surrender by operation of law arises ‘where the owner of a particular estate has been party to some act the validity of which he is by law estopped from disputing, and which would not be valid, if his particular estate had continued.’ (949).

This was true in the present case;

‘As far as the plaintiff, the landlord, is concerned, he has created an estate in the new tenant which he is estopped from disputing with him, and which is inconsistent with the continuance of the defendant’s term. As far as the new tenant is concerned, the same is true. As far as the defendant, the owner of the particular estate in question, is concerned, he has been an active party in this transaction, not merely by consenting to the creation of the new relation between the landlord and the new tenant, but by giving up possession and so enabling the new tenant to enter.’ (949)

Oral agreement to surrender

Where tenants stay in possession after the time when they should have left the property in accordance with an oral agreement to surrender (unenforceable for failure to comply with s. 3(1) of the Conveyancing and Property Ordinance) there is no grant of a new periodic tenancy giving rise to a surrender by operation of law unless this accords with the substantive result intended by the parties. Whether the tenant can rely on the oral agreement (eg to assist its claim to recover the deposit paid under the lease) depends on whether or not, in substance, it would be seeking to enforce the oral agreement.

In Take Harvest Ltd v George H Liu ([1993] A.C. 552, PC) L granted a one year lease to T. The lease provided that the deposit would be repaid to T on the expiry of the term or the sooner determination of the term. The parties orally agreed that the lease would be surrendered on 30 November. Before then, L changed his mind and told T that the lease must continue. In the event, T sought to give back possession on 10 December but L refused to accept the surrender. T claimed the return of the deposit and L claimed for rent as if the lease had continued.

T had succeeded in the Hong Kong courts on the basis that when T stayed in possession after the 30 November there was the (fictitious) grant of a new periodic tenancy that did not need to be in writing because of section 6(2) of the Conveyancing and Property Ordinance. Since such a tenancy would be inconsistent with the preceding tenancy, the latter came to an end by virtue of a surrender by operation of law (for which writing is not needed). The Privy Council rejected this. There could only be a finding of the grant of a periodic tenancy and consequent surrender by operation of law if this was the substantive result intended by the parties. It was not; they had intended to agree only on a surrender.

T claimed in any event that it could rely on the oral agreement to allow it to recover the deposit. It would point to the express term in the lease entitling it to recover the deposit. It would only need to rely on the oral agreement to counter the landlord’s response that the lease had not yet come to an end. The tenant failed in this regard too; in substance it would be seeking to enforce the oral agreement. This was not like the case where a buyer pulled out of an oral contract and the seller retained the deposit in accordance with the terms of the oral agreement; in such a case, the seller would not be seeking to enforce the contract.

L had not pleaded section 3 until the matter came before the Privy Council. The Privy Council gave leave to alter the pleadings in this regard but also allowed T to plead part performance and estoppel for the first time. The matter was remitted to the District Court.

Leases: when does a variation amount to a surrender and regrant? Personal covenants and covenants that ‘touch and concern’ the land.

A deed of variation of a lease only amounts to a surrender and re-grant where the legal estate has been altered (perhaps this can only be done by altering either the premises or the term). An assignee of the lease might agree to significant variations of the terms of the lease. In principle, the original tenant remains liable for the personal obligation in the original lease terms (but in Hong Kong section 41(8) of the Conveyancing and Property Ordinance releases assignors from liability for post-assignment breaches of covenants that fall within section 41(2)). Of course an original tenant could agree to be liable for post-assignment breaches (of the original and / or varied lease terms).

In Friends Provident Life Office v British Railways Board ((1997) 73 P & C.R. 9, CA (Eng)) L owned the reversion of a lease granted to T. T assigned to A1 who entered into a deed of variation that increased the rent and altered the user and alienation clauses. A1 assigned to A2. A2 went into liquidation. L claimed from T the rent arrears that had accrued while A2 was in possession. T argued that it had no liability under the lease at all since the changes introduced by the deed of variation had been so significant as to amount to a new lease. This failed in the Court of Appeal. A deed of variation of a lease only amounts to a surrender and re-grant where the legal estate has been altered (perhaps this can only be done by altering either the premises or the term). Here the variation was not so significant as to give rise to a change in the estate.

T was liable to pay the original rent because of its personal covenant to do so (this must be read in the light of CPO s.41(8) in Hong Kong). It was not liable to pay the increased rent since the terms of its covenant did not cover any such increase.

Conduct required for surrender by operation of law

A lease is surrendered by operation of law when the conduct of the parties amounts to an unequivocal acceptance that the tenancy has ended.

In Bellcourt Estates Ltd v Adesina ([2005] EWCA Civ. 208, CA (Eng)) the tenant had vacated the property and stopped paying rent. The question was whether the landlord’s delay in taking any action in response to this situation amounted to an acceptance that the lease had come to an end. The English Court of Appeal decided that it did not. It suggested that the law can be stated thus:

‘The conduct of the parties must unequivocally amount to an acceptance that the tenancy has ended. There must either be relinquishment of possession and its acceptance by the landlord, or other conduct consistent only with the cesser of the tenancy, and the circumstances must be such as to render it inequitable for the tenant to dispute that the tenancy has ceased or such as to render it inequitable for the landlord to dispute that the tenancy has ceased.’ (see Woodfall para 17.020 but the Court of Appeal suggested that the final phrase should be added to the passage).

Surrender by operation of law requires unequivocal conduct by the landlord and the tenant

Surrender by operation of law requires unequivocal conduct on the part of the landlord and the tenant.

In Sanctuary Housing Association v Campbell ([1999] 1 WLR 1279, CA (Eng)) a tenant wanted to surrender her tenancy. The landlord told her that to do so she had to vacate the property and return the keys. She returned the keys but informed the landlord that she could not empty all of her belongings from the property because it was occupied by her violent husband. He had changed the locks. It was held that by complying with the landlord’s requirements as far as she was able, the tenant had brought about a surrender by operation of law. The conduct of both parties was unequivocal.

Estoppel is the basis of surrender by operation of law. When does payment of rent give rise to a periodic tenancy?

A surrender by operation of law arises independently of the intention of the parties where the conduct of the parties unequivocally amounts to an acceptance that the tenancy is ended. Whether payment of rent on a weekly or monthly basis gives rise to a periodic tenancy depends on the intention of the parties. If the payment can be satisfactorily explained on the basis of some intention other than that of an intention to create a periodic tenancy then none will arise.

In Mattey Securities Ltd v Ervin ((1999) 77 P & CR 160 CA (Eng)) the defendant had given the landlord a guarantee that the tenant would pay rent. The tenant went into administration owing rent arrears. A new company took possession and the landlord accepted rent arrears and rent from the new occupier which also ran into financial difficulty. There was no assignment of the lease to the new occupier although the landlord and the occupier had been in negotiation after the occupier had gone into the property concerning a possible assignment. Could the landlord enforce the guarantee of the lease? Or had acceptance of the rent from the new occupier amounted to a surrender by operation of law so that the guarantor had no liablility for arrears that accrued after that date?

A surrender by operation of law does not depend on the intention of the parties. It is based on estoppel and arises when the conduct of the parties unequivocally amounts to an acceptance that the tenancy is ended. Here the negotiations for an assignment showed that the parties assumed the continuation of the original lease even after the new occupier took over possession and paid rent.

Whether payment of rent on a weekly or monthly basis gives rise to a periodic tenancy does depend on the intention of the parties. Here the landlord had accepted rent because it was due under the original lease and he did not care who paid it. There was no intention to create a periodic tenancy.