Is a mortgagee’s consent required for a lease surrender?
Commercial landlords and tenants frequently enter into consensual arrangements to surrender (i.e. terminate early) a lease before the expiry of the lease term. A surrender may be effected either expressly by a deed between the landlord and the tenant or by operation of law. A lease is surrendered by operation of law where the conduct of the parties amounts to an acknowledgment that the tenancy has ended or is otherwise inconsistent with the continuation of the tenancy. For example, where the parties purport to extend the lease term, this will act as a surrender of the lease by operation of law because if it did not, there would be two leases of the same land which would run concurrently until the original lease term expired. Therefore, the parties must have intended to surrender the original lease and simultaneously enter into a new identical lease for the extended term.
A surrender releases the landlord and the tenant from future liability in relation to their respective obligations under the lease. A surrender will only release the parties from existing liability for past breaches if the deed of surrender expressly provides for this.
If the landlord’s title is charged to a mortgagee then the mortgagee’s consent to the surrender may be required under the terms of the charge. If it is, then the mortgagee’s consent must be obtained on or before completion of the surrender in order for the surrender to be effective.
In the case of Co-operative Bank Plc v Hayes Freehold Ltd (In Liquidation)  the High Court considered a deed of surrender which purported to effect: (a) the surrender of a superior lease, (b) the surrender of an underlease and (c) an unconditional and irrevocable release of the undertenant’s guarantor. The superior landlord’s title was charged and the mortgagee’s consent was required under the terms of the charge. The consent was not obtained. The High Court therefore held that the surrender itself was ineffective but that the deed of surrender did release the undertenant’s guarantor unconditionally and irrevocably because the guarantor’s release was not subject to a condition that the superior landlord had obtained its mortgagee’s consent.
This case acts as an important reminder of two fundamental points when landlords and tenants are dealing with a lease surrender. Firstly, the importance of obtaining the mortgagee’s consent to a surrender where the terms of the charge require it to be obtained and, secondly, ensuring that the release of each party from their liabilities under the lease is linked to the effectiveness of the surrender. Otherwise, as was seen in the Co-operative Bank case, there may be instances where the surrender itself is void but the release of a party’s liability under the lease still takes effect.