A recent court case shows all landlords, and tenants, how important it is to get a mortgage lender’s consent before deciding to grant, or accept, the surrender of a property’s lease. Our trainee solicitor, Tod Davies, explains the case – and the warning it gives to business tenants.
If a lease doesn’t contain a ‘break’ option, the only way to get out of it is if the landlord and the tenant agree. This is called a ‘surrender’. In a recent case, a tenant fell into a ‘surrender trap’ – created by a cryptically worded section of the Law of Property Act.
Deutsche Bank was the tenant of a data centre near Heathrow Airport, where it paid a sizeable rent of £2.6 million per year. It decided it no longer needed the premises, so agreed an ‘underlease’ with Sentrum Hayes, matching the original rent. Hayes Freehold – a company in the same group as Sentrum – then bought the property. The Co-Operative Bank loaned Hayes Freehold a £25m loan to do so – on the condition that it’d have to get consent if it wanted to sell, lease, or dispose of the property.
Hayes Freehold (as landlord), Deutsche Bank (as head tenant) and Sentrum (as undertenant) then agreed to simultaneously surrender both leases, freeing each other from any obligations.
But, Hayes Freehold didn’t get consent from the Co-Op to do so.
Without the Co-Op’s consent, the surrender of the head lease wasn’t valid – meaning Deutsche Bank was still the head tenant. To make things worse for Deutsche Bank, the court ruled that the surrender of the ‘underlease’ with Sentrum was valid, because it didn’t need the Co-Op’s consent.
So, as it’d effectively released Sentrum from any obligation to pay rent, Deutsche Bank was responsible for paying £2.6m rent for a property it didn’t occupy.
This case demonstrates the importance of investigating a landlord’s title when considering – or working with – a lease surrender. If a landlord has a mortgage, and their mortgage lender’s consent is required before they sell or lease the property, then it must be obtained.
This is a key point for any tenant to check – and can be very costly if ignored: just ask Deutsche Bank.