England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
NEWCASTLE UPON TYNE DISTRICT REGISTRY

		The Combined Court Centre The Quayside Newcastle NE1 3LA
		25 January 2013

Judge Behrens:

1. Introduction

1. This is a dispute between a landlord and the surety of an insolvent tenant. There are two leases involving Units 2 and 4 Durbar Industrial Estate, Durbar Avenue, Coventry. In each lease RVB Investments Limited ("the Landlord") was the landlord, Cannon Transport (Midlands) Limited ("the Tenant") was the tenant and Mr Bibby ("the Surety") was the surety.
2. The Tenant is insolvent having entered into Creditors Voluntary Liquidation on 30 July 2008. On 25^th November 2008 the Liquidator filed a Notice of Disclaimer in respect of Unit 4. On 27^th March 2009 the Tenant was dissolved. On 19^th May 2011 the Treasury Solicitor filed Notice of Disclaimer in respect of Unit 2.
3. On 5^th August 2011 the Landlord's solicitors ("Manby Bowdler") wrote to the Surety requesting that he take a new lease of Unit 2 for the residue of the term. The rent inserted into the draft was not the same as the rent under the old lease because the Landlord sought to take advantage of the rent review provisions in the lease. The Surety has refused to do so.
4. In these proceedings the Landlord seeks:

1. an order for specific performance that the Surety should execute and complete the new lease;

2. rent, service charge due in respect of Units 2 and 4 amounting to £557,258.08 (now agreed (subject to liability) in the sum of £528,002.22);

3. if an order for specific performance is not granted, then rates due in respect of Unit 2 amounting to £27,914.23 (now agreed (subject to liability) in the sum of £23,261.87).

5. The Surety resists the claim on a number of grounds:

1. He asserts that the Surety's obligations came to an end on the dissolution of the Tenant on 27^th March 2009.

2. He asserts that the leases were surrendered or forfeited by the Landlord.

3. He relies on section 17 of the Landlord & Tenant (Covenants) Act 1995.

4. He asserts that the Court should not order specific performance

2. The Leases

6. The lease of Unit 2 was dated 4^th December 2007 and was for a term of 5 years from that date. The initial rent was £78,000 p.a payable in advance on the usual quarter days. It contained covenants by the Tenant to pay a service charge, sums in respect of insurance and to indemnify the Landlord against rates and other taxes. It contained a provision for a rent review on the third anniversary of the term (i.e. 4^th December 2010). The rent review provisions are contained in Schedule 8 and occupy some 3 pages of the lease. In summary:

1. At the review date the rent is to be reviewed "in accordance with the provisions of this Schedule"

2. The reviewed rent is to be the greater of the rent payable immediately before the review date adjusted by the Retail Price Index and the Open Market Rent on the review date.

3. There is a detailed procedure for determining the Open Market Rent on the review date. In summary:

1) It may be agreed at any time between the Landlord and the Tenant.

2) (In the absence of agreement) it is determined by an independent valuer on the application of either party made not more than 3 months before or any time after the review date (time not being of the essence).

4. When the amount of the reviewed rent has been ascertained a memorandum is to be signed by and on behalf of the Landlord and the Tenant and annexed to the Lease.

7. The provisions relating to the Surety are incorporated in clause 8 of the Lease and contained in Schedule 6. In the light of the arguments in this case it is convenient to set them out in full
8. The Surety covenants with the Lessor and without the need for any express assignment with the Lessor's successors in title that the Lessee will during the period from the date hereof until the expiry of the tenancy hereby created or (if earlier) the date on which the Lessee ceases to be bound by the covenants in this lease ("the Guarantee Period") pay the rents and all other sums due under and perform and observe the covenants on the part of the Lessee and other terms of this lease and that if the Lessee fails to do so the Surety will do so and will indemnify the Lessor against damages cost and expenses incurred by the Lessor as a result of the Lessee's failure.
9. The Surety will be liable to the Lessor as a sole or principle debtor PROVIDED THAT any neglect or forbearance of the Lessor in endeavouring to obtain payment of said rents and payments as and when the same become due or its delay to take steps to enforce performance or observance of the covenants on the part of the Lessee and other terms of this lease and any time which may be given by the Lessor to the Lessee shall not release or in any way lessen or affect the liability of the Surety hereunder.
10. If this lease is disclaimed or forfeited during the Guarantee Period the Lessor may within six months after such disclaimer or forfeiture by notice in writing require the Surety to accept a new lease of the Premises for a term equivalent to the residue which if there had been no disclaimer or forfeiture would have remained of the Term at the same rent and subject to the like covenants and conditions as are payable under and applicable to the tenancy immediately before the date of such disclaimer or forfeiture and in such case the Surety shall pay the Lessee's costs incurred by the Lessor in connection with such new lease and the Surety shall accept such new lease accordingly and will execute and deliver to the Lessor a counterpart thereof.

 The lease of Unit 4 is dated 9 November 2005 and was for a term of 5 years from that date. The rent payable was £48,000 p.a payable in advance on the usual quarter days. It contained covenants by the Tenant to pay a service charge, sums in respect of insurance and to indemnify the Landlord against rates and other taxes. It is not necessary to refer to the rent review clause. The provisions relating to the Surety are identical to those in the Unit 2 lease.

3. The law

11. There are a number of factual disputes which it will be necessary to resolve in relation to the question of whether the leases have been forfeited or surrendered. However the liability of a surety of a lease where the tenant has entered liquidation and the liquidator and/or the Crown has disclaimed liability under the lease is primarily a question of law. It is convenient to deal with these issues before embarking on the resolution of the factual issues.
12. Before doing so it is right that I should record my thanks to both Mr Bibby (and/or his McKenzie Friend who had plainly done a lot of research) and Ms Jarron for the very detailed and helpful skeleton arguments they provided.
13. Although Mr Bibby represented himself he provided me with a detailed skeleton argument, a detailed written closing submission and an analysis of the law with copies of all authorities relied on. It was most helpful. His cross-examination was pertinent and to the point.

3.1 The effect of liquidation – Disclaimer by the Liquidator.

14. The liquidation of the Tenant has no effect upon its obligations to pay rent and comply with other covenants under the leases. The lease remains vested in the Tenant although the passing of the resolution to wind up the Tenant is defined as a "Terminating Event" and gives the Landlord the right (but not the duty) to re-enter after serving an appropriate section 146 Notice. [See clause 6 of the leases]. Similarly the Landlord has a right of re-entry for non-payment of rent.
15. Sections 178 to 182 of the Insolvency Act 1986 are a group of sections governing the disclaimer of onerous property by a liquidator of a company that is being wound up. Section 178(2) empowers a liquidator to disclaim any onerous property.¨ Onerous property means any unprofitable contract, and any other property of the company which is unsaleable or not readily saleable or such that it may give rise to a liability to pay money or perform any other onerous act. Subsection (4) sets out the effect of a disclaimer. It reads:

'A disclaimer under this section--(a) operates so as to determine, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed; but (b) does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.'

16. Subsection (6) spells out a further consequence of disclaimer:

'Any person sustaining loss or damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up.'

17. The effect of these provisions in so far as they affect the liability of guarantors was considered in detail in the decision of the House of Lords in Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70. As Lord Nicholls, who gave the leading speech, explained:

The matter stands differently where the landlord has the benefit of covenants from a guarantor. In this situation the liabilities of the insolvent tenant to the landlord are ended, but not so as to affect the obligations of the guarantor to the landlord. That is the effect of para (b) of s 178(4). Similarly, where the insolvent tenant is an assignee and the landlord has the benefit of the covenants of the original tenant: the original tenant's obligations to the landlord are not affected.

Also ended is the obligation of the insolvent tenant to indemnify the guarantor but, here again, not so as to affect the mutual rights and obligations of the landlord and the guarantor. Termination of the liabilities of the insolvent does not carry with it any legal necessity to determine the guarantor's obligations to the landlord. The right of recourse of the guarantor against the insolvent can be effectually determined without, at the same time, releasing the guarantor from his liability to the landlord. His liability to the landlord can survive extinguishment of his right of recourse. Similar considerations apply to the liabilities of the original tenant where the insolvent tenant is an assignee.

…

The search, therefore, is for an interpretation of the legislation which will enable this to be achieved as well as fulfilling the primary purpose of freeing the insolvent from all liability while, overall, doing the minimum violence to accepted property law principles.

If the problem is approached in this way, the best answer seems to be that the statute takes effect as a deeming provision so far as other persons' preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided.

…

If no vesting order is made and the landlord takes possession, the liabilities of other persons to pay the rent and perform the tenant's covenants will come to an end as far as the future is concerned. If the landlord acts in this way, he is no longer merely the involuntary recipient of a disclaimed lease. By his own act of taking possession he has demonstrated that he regards the lease as ended for all purposes. His conduct is inconsistent with there being a continuing liability on others to perform the tenant covenants in the lease. He cannot have possession of the property and, at the same time, claim rent for the property from others.

16. Stacey v Hill [1901] 1 KB 660 was a case where the tenant went bankrupt and his trustee in bankruptcy disclaimed the lease. The Landlord did not resume possession. The Court of Appeal held that the guarantor was not liable for the rent after the disclaimer. In the course of his speech Lord Nicholls overruled this decision. He gave a number of reasons. First the decision flew in the face of the plain language of the statute (now s 178(4)(b)). Second disclaimer operates to determine the insolvent's liability under the lease but subject to a qualification – not so as to affect the rights or liabilities of other persons. Thus the general rule that the discharge of the principal discharges the surety does not apply. Third Lord Nicholls did not accept that it was necessary to discharge the surety in order to extinguish the insolvent's liability. The fundamental purpose of an ordinary guarantee of another person's debts is that the risk of the principal debtor's insolvency should fall on the guarantor and not the creditor. If the debtor is unable to pay his debt when it falls due his bankruptcy does not release the guarantor.

17. Hindcastle is of course binding on this court. To my mind it precisely covers the situation in relation to Unit 4. As already noted the Liquidator disclaimed the lease on 25^th November 2008. Subject to the question of the Landlord taking possession and/or surrender of the lease which is considered below it follows from Hindcastle that the disclaimer did not discharge the Surety.

18. Mr Bibby seeks to avoid this conclusion by reference to the words of paragraph 1 of Schedule 6:

The Surety covenants with the Lessor and without the need for any express assignment with the Lessor's successors in title that the Lessee will during the period from the date hereof until the expiry of the tenancy hereby created or (if earlier) the date on which the Lessee ceases to be bound by the covenants in this lease ("the Guarantee Period") pay the rents (my emphasis)

19. He points out that on disclaimer the Tenant ceased to be bound by the covenants in the lease. He accordingly submits that on the natural reading of the emphasised part of the paragraph the Surety's liability came to an end at that time.
20. This is an ingenious argument. As Ms Jarron pointed out the argument is not dissimilar to one rejected by Lord Nicholls at the end of his speech. In that case the surety's obligation was to pay rent "during the residue of the term created by the lease" and "during the continuance of the lease". Lord Nicholls rejected the argument that the parties had contracted that the disclaimer would end the lease for all purposes.
21. It has to be remembered that this tenancy is subject to The Landlord and Tenant (Covenants) Act 1995. Under section 5 of that Act if the tenant assigns the whole of the premises demised to him, he is released from the tenant covenants of the tenancy. Thus, as it seems to me, the emphasised part of paragraph 1 is dealing with a situation where the Tenant has assigned the lease. It lends no support for a construction that would release the Surety on a disclaimer following liquidation of the Tenant which would, of course, be contrary to the express words of section 178(4)(b).
22. The ultimate aim of interpreting a contractual provision is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. In my view a reasonable person would not have understood the parties to have meant that the Surety's covenants came to an end on such a disclaimer.
23. Thus, subject to questions of possession and/or surrender I reject Mr Bibby's arguments in relation to the effect of the disclaimer in respect of Unit 4.

3.2 Dissolution and Disclaimer by the Crown.

24. For reasons that do not appear in the evidence the Liquidator did not disclaim the lease in respect of Unit 2. Ms Jarron suggested this was an error. She may be right but nothing turns on it. In any event, as already noted, the Tenant was dissolved on 27^th March 2009. On 19^th May 2011 the Treasury Solicitor on behalf of the Crown filed Notice of Disclaimer.
25. Mr Bibby has raised similar arguments in relation to Unit 2 as he raised in respect of Unit 4. He submitted that the lease came to an end when the Tenant was dissolved. Alternatively he submitted that it came to an end when the lease was disclaimed. He submitted, either as a matter of law or construction of paragraph 1 of Schedule 6 that the liability of the Surety accordingly terminated.
26. The relevant statutory provisions are sections 1012, 1013 and 1015 of the Companies Act 2006.

1012 Property of dissolved company to be bona vacantia

(1) When a company is dissolved, all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution (including leasehold property, but not including property held by the company on trust for another person) are deemed to be bona vacantia and--

(a) accordingly belong to the Crown, or to the Duchy of Lancaster or to the Duke of Cornwall for the time being (as the case may be), and

(b) vest and may be dealt with in the same manner as other bona vacantia accruing to the Crown, to the Duchy of Lancaster or to the Duke of Cornwall.

1013 Crown disclaimer of property vesting as bona vacantia

(1) Where property vests in the Crown under section 1012, the Crown's title to it under that section may be disclaimed by a notice signed by the Crown representative, that is to say the Treasury Solicitor, …

(2) The right to execute a notice of disclaimer under this section may be waived by or on behalf of the Crown either expressly or by taking possession.

(3) A notice of disclaimer must be executed within three years after--

(a) the date on which the fact that the property may have vested in the Crown under section 1012 first comes to the notice of the Crown representative, or …

1015 .. General effect of Disclaimer

(1) The Crown's disclaimer operates so as to terminate, as from the date of the disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed.

(2) It does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person.

27. It will be seen therefore that the lease of Unit 2 did not terminate on dissolution. It vested in the Crown as bona vacantia. It is not suggested that the Crown waived the right to disclaim the lease either expressly or by taking possession. The Notice of Disclaimer was executed within the three year period and was thus valid.

28. It is to be noted that the provisions of section 1015 are, in all material respects, identical to those contained in section 178(4) of the Insolvency Act 1986. In those circumstances the law applicable to that section derived from Hindcastle applies with equal force to a disclaimer under section 1013 of the Companies Act 2006 as it does to a disclaimer under section 178(2) of the Insolvency Act 1986.

28. It follows, for the reasons set out in the previous section that subject to questions of surrender and/or taking possession I reject Mr Bibby's arguments as to the effect of the dissolution and disclaimer by the Crown.

3.3 The Landlord and Tenant (Covenants) Act 1995

29. Mr Bibby raised a short point under section 17 of The Landlord and Tenant (Covenants) Act 1995. In summary he submitted that the Landlord had failed to serve a Notice under section 17(3) of the Act on the Surety within the 6 month period specified in the Act. Accordingly the Surety is not liable under the terms of the guarantee. Ms Jarron on behalf of the Landlord accepts that no section 17(3) Notice has been served. She contends that such a notice is not necessary where, as here, there has been no assignment by the Tenant.

The statutory provisions

30. In order to consider Mr Bibby's argument it is necessary to consider sections 1, 5(1),(2), 11(1), 11(2), 17(3) and 28(1) of the Act. For convenience I set them out below.

1 Tenancies to which the Act applies

(1) Sections 3 to 16 and 21 apply only to new tenancies.

(2) Sections 17 to 20 apply to both new and other tenancies.

5 Tenant released from covenants on assignment of tenancy

(1) This section applies where a tenant assigns premises demised to him under a tenancy.

(2) If the tenant assigns the whole of the premises demised to him, he--

(a) is released from the tenant covenants of the tenancy, and

(b) ceases to be entitled to the benefit of the landlord covenants of the tenancy,

as from the assignment.

11 Assignments in breach of covenant or by operation of law

(1) This section provides for the operation of sections 5 to 10 in relation to assignments in breach of a covenant of a tenancy or assignments by operation of law ("excluded assignments").

(2) In the case of an excluded assignment subsection (2) or (3) of section 5—

(a) shall not have the effect mentioned in that subsection in relation to the tenant as from that assignment, but

(b) shall have that effect as from the next assignment (if any) of the premises assigned by him which is not an excluded assignment.

17 Restriction on liability of former tenant or his guarantor for rent or service charge etc

(3) Where a person ("the guarantor") has agreed to guarantee the performance by the former tenant of such a covenant as is mentioned in subsection (1), the guarantor shall not be liable under the agreement to pay any amount in respect of any fixed charge payable under the covenant unless, within the period of six months beginning with the date when the charge becomes due, the landlord serves on the guarantor a notice informing him--

(a) that the charge is now due; and

(b) that in respect of the charge the landlord intends to recover from the guarantor such amount as is specified in the notice and (where payable) interest calculated on such basis as is so specified.

28 Interpretation

(1) In this Act (unless the context otherwise requires--

"assignment" includes equitable assignment and in addition (subject to section 11) assignment in breach of a covenant of a tenancy or by operation of law;

Submissions

31. Mr Bibby's argument starts by reference to the definition of assignment which includes an "assignment by operation of law". He submits that the vesting of Unit 2 in the Crown is such an assignment. In those circumstances he submits that, after that assignment the Tenant became "the former tenant" within the meaning of section 17(3) with the result that after that date the Surety had guaranteed the performance of "the former tenant". Hence he submitted that in order to enforce liability against the Surety the Landlord had to serve a section 17(3) notice in respect of any rent liability falling due after the Crown had disclaimed the lease.
32. Ms Jarron submitted that the section had no application to a vesting under section 1013 of the Companies Act 2006.

Discussion

33. A number of points are clear. First Mr Bibby's argument can have no application to the claims in respect of Unit 4. The lease of Unit 4 remained vested in the Tenant until it was disclaimed by the Liquidator. Thus there was no statutory vesting of Unit 4 at all. Second the notice is only required in respect of payment by the guarantor of a "fixed charge payable under the covenant". It would not therefore appear to prevent the Landlord from seeking to enforce a covenant (such as paragraph 3 of Schedule 6) requiring the Surety to accept a new lease for the residue of the term following disclaimer or forfeiture during the Guarantee period. Equally it would not appear to prevent a claim for damages for breach of, or in lieu of an order for specific performance of such a covenant. Thus even if Mr Bibby's argument is correct it provides no defence to the claims in respect of Unit 4 and no defence to the claim for specific performance in respect of Unit 2.
34. I cannot, however, accept Mr Bibby's argument. Whilst he is correct that the definition of assignment in section 28 includes assignments by operation of law the inclusion is expressly made subject to section 11. Under section 11 an assignment by operation of law is defined as "an excluded assignment" and it is expressly provided in section 11(2)(a) that such an assignment does not release the tenants from his covenants under the lease.
35. In those circumstances it does not seem to me that the obligation under section 17(3) arises where as here following liquidation the Tenant is dissolved.

3.4 Specific Performance

36. Mr Bibby raises a number of matters in answer to the claim for specific performance of Unit 2.

The rent

37. Under paragraph 3 of Schedule 6 the new lease was to be:

at the same rent and subject to the like covenants and conditions as are payable under and applicable to the tenancy immediately before the date of such disclaimer

38. The draft lease provided by Manby Bowdler specified a higher rent than the £78,000 p.a specified in the lease. Furthermore it was common ground that even though the review date had passed no attempt had been made to invoke the rent review procedure summarised above. There was no attempt to agree the rent, no attempt to appoint an independent valuer and no memorandum recording the ascertained rent.
39. The Landlord argued that the minimum rent payable under the review would have been the old rent adjusted in accordance with the RPI. The rent in the new lease provided by Manby Bowdler had accordingly been adjusted to reflect the increase due to the RPI.
40. Whilst I see the force of the Landlord's point I do not for my part see that the Landlord can simply ignore the rent review provisions in the lease. In the absence of a valid review the rent payable immediately before the date of the disclaimer was £78,000 p.a. That is the rent payable under the new lease. It may be that the Landlord would be entitled to have the rent reviewed. I express no view as to whether the words "at any time after the review date" include a time after the lease has expired by effluxion of time. However in my judgment the Landlord is not entitled to insert into the new lease a rent based on a review that has not taken place.
41. Mr Bibby submitted that this was a complete defence to the claim for specific performance. With respect I cannot agree. It simply means that the new lease would incorporate rent at the rate of £78,000 p.a.

Damages are an adequate remedy

42. Normally it is trite law that an agreement for the sale or lease of land will be enforced by an order for specific performance. However the unusual feature of this case is that the term to be granted by the new lease would have expired on 4^th December 2012 and thus there would be no point in compelling Mr Bibby to enter into the lease. Equivalent relief can be obtained simply by awarding damages for breach of the agreement to enter into the lease.
43. At one time I thought there was considerable force in the point. However Ms Jarron has persuaded me that damages are not an adequate remedy.
44. It is common ground that the Surety Mr Bibby is insolvent. He readily accepted when he gave evidence that he was not in a position to meet a judgment of £500,000 or anything like it. Thus a monetary judgment against Mr Bibby will be of limited value.
45. Ms Jarron drew my attention to the position with regard to the rates. Both Unit 2 and Unit 4 are unoccupied. Under section 45 of the Local Government Finance Act 1988 the owner of unoccupied property is, if certain conditions are satisfied, liable for a non domestic rate in respect of that property. Under section 65(1) of that Act the owner of a hereditament is the person entitled to possession of it. Ms Jarron referred me to the decision in Kingston Upon Thames v Marlow [1996] EGLR 1. That case involved a claim against a tenant for rates under section 45. The tenant alleged that the lease had been forfeited and that he was not entitled to possession. The Magistrates and the Divisional Court agreed. Simon Brown LJ identified the critical question as being whether the landlord or the tenant was entitled to possession from the critical date.
46. Currently Coventry City Council is pursuing the Landlord in respect of non domestic rates. The Landlord submits that if the lease is granted it will be able to argue that Mr Bibby was entitled to possession and accordingly it is Mr Bibby and not the Landlord that is liable for the rates. Whilst no doubt the Landlord would be entitled to an indemnity from Mr Bibby it is valueless.
47. In my view there is force in this argument. Damages are not an adequate remedy.

Delay

48. Mr Bibby complains about the delay between 2008 and the request made by Manby Bowdler on 5^th August 2011. However the Landlord's rights under paragraph 3 of Schedule 6 did not arise until the disclaimer on 19^th May 2011. The request from Manby Bowdler was within 6 months of that date and thus complied with paragraph 3 of Schedule 6.
49. There has been no significant delay since August 2011. Thus there are no grounds to complain under the head of delay.

Hardship

51. The only hardship relied on by Mr Bibby is his impecuniosity. To my mind this is not a defence to a claim for specific performance. Indeed it will make little difference. In the absence of an order for specific performance the Landlord would be entitled to damages for breach of the obligation to enter into the new lease. The damages payable would be substantially the same as the sums payable under an order for specific performance.

50. It follows that none of the legal defences raised by Mr Bibby succeed. It is, however, necessary to consider the defences based on the claim that the Landlord accepted a surrender of the leases and/or re-took possession.

4. Possession and/or Surrender

4.1 The Law

51. There was little, if any, dispute as to the relevant law. I was referred to a number of authorities including Artworld v Safaryan [2009] EWCA Civ 303, Bellcourt Estates v Adesina [2005] EWCA Civ 208, and Relvok Properties v Dixon [1973] P & C R 1.
52. In Artworld Jacob LJ set out the law as to surrender by operation of law in paragraphs 11 – 13 of his judgment:

11. … "It was common ground that the legal test for surrender by operation of law, is essentially accurately set out in Woodfall's Law Of Landlord and Tenant. I am reading from an edition which appears to have a date of January 2007. Paragraph 17.018 says:

"There is legal distinction between a surrender by operation of law and an implied surrender. The terms surrender by operation of law 'is applied to cases where the owner of a particular estate has been a party to some act the validity of which he is afterwards estopped from disputing, and which would not be valid if his particular estate had continued to exist…'"

12. There the law treats the doing of such act as constituting a surrender. This principle does not depend on the actual intention of the parties but on estoppel. A surrender by operation of law does not depend on the intention of the parties; it takes place independently and, even in spite of intention, the foundation of the doctrine is estoppel.

13. Most critically for present purposes is paragraph 17.020, headed "Act must be unequivocal":

"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 landlord or the tenant to dispute that the tenancy has ceased."

53. In paragraphs 30 and 31 of the judgment in Bellcourt Peter Gibson LJ put the matter thus:
54. The doctrine of surrender by operation of law is founded on the principle of estoppel, in that the parties must have acted towards each other in a way which is inconsistent with the continuation of the tenancy. That imposes a high threshold which must be crossed if the tenant is to be held to have surrendered and the landlord is to be held to have accepted the surrender.
55. The effective re-delivery of possession by the tenant and its acceptance by the landlord are vital. Thus there will be a surrender when the tenant returns the keys of the premises and the landlord accepts them in circumstances which indicate that the tenancy thereafter no longer exists. The landlord must take possession in such a manner as to estop him from denying that the tenancy is at an end.
56. In paragraph 17 of his judgment in Bellcourt Longmore LJ had referred to Relvok where changing the locks after a tenant had left was insufficient to show that the lease had ended. He cited this passage from the judgment of Sachs LJ:

"... as the law stands it is open to a landlord whose tenant has absconded both to protect the security of his premises and the state of their repair and yet maintain his rights for rent against that tenant until a fresh one is found and he then thinks fit to enforce the forfeiture. Whether in any individual case the landlord has done more than thus protect his interests is of course a question of fact in each case. The onus lies on the tenant to prove that more has been done and thus the lease terminated."

57. Ms Jarron also referred me to paragraph 17.089 of Woodfall which deals with forfeiture by physical re-entry. The authors make it clear that the acts relied on must be unequivocal and cite Relvok in support of that proposition.

4.2 Mr Bibby's claims

58. Mr Bibby relies on a number of matters in support of his claims. It is convenient to deal with them separately.

Return of the keys in July 2008.

59. Mr Bibby accepts that the Tenant continued trading at Unit 2 and Unit 4 until the end of June 2008. However insolvency practitioners were consulted in June 2008 and he said that trading ceased at the end of June 2008. Mr Baker, the Warehouse Manager remained on site. It was not clear when Mr Baker left. Mr Bibby suggested it was in July 2008.
60. On 11^th July 2008 Mr Bibby, as the Director of the Tenant, circulated creditors informing them that the Tenant was commencing liquidation proceedings. It is common ground that the Landlord received that letter.
61. Mr Bibby asserts that he received a letter in July 2008, addressed to his office in Washington, Tyne & Wear, requesting the return of the keys. Unfortunately he does not have a copy of the letter. Furthermore the Landlord has no record on its file of having sent such a letter. According to Mr Bibby there was no indication in the letter of the purpose for the request.
62. Mr Bibby said that he contacted Mr Baker by telephone and asked him to return the keys to the Landlord. He asserts that Mr Baker duly returned the keys by post. He relies on a telephone conversation he says he had with Mr Baker in late 2008 or early 2009 and two documents signed by Mr Baker. The first is undated but accordingly to Mr Bibby was received by him in August 2011. In it Mr Baker says:

Just to confirm telephone conversation I returned the keys for the two Units that [the Tenant] rented by post to the address given by yourself. I sent them in a jiffy bag first post.

63. The second is dated 12^th December 2012 and is in the form of a statement. It reads:

Following the administration of [the Tenant] as the Warehouse Manager I was asked by [Mr Bibby] to return the keys to the Landlord. These were placed in a jiffy bag and posted by first class post.

The premises were left locked and both forklift trucks and racking were still on site.

Also before I actually returned the keys I needed to recover my drainage rods and contacted Cliff of RVB in order to do so. … Cliff clearly stated that the locks had already been changed and had started clearing the place.

64. Mr Baker was not called to give evidence. According to Mr Bibby he wished to call him but following an objection from Manby Bowdler he was unable to do so. "Cliff" in the final paragraph is a reference to Cliff Leigh, the Principal Surveyor employed by the Landlord. Regrettably Mr Leigh died in May 2012 and was thus unable to give evidence. As will appear later Mr Leigh was on site on a number of occasions between July 2008 and April 2009.
65. There are a number of difficulties with Mr Bibby's case. First he cannot produce the letter he says he received. Second there is no evidence that the keys were ever received by the Landlord. In the light of the subsequent correspondence it seems unlikely that they were received. Third the case is inconsistent with the correspondence in late 2008 and early 2009.
66. On 4^th December 2008 Manby Bowdler wrote to the liquidator asserting that the Tenant remained a tenant in respect of Units 2 and 4. The letter went on to request the keys purely for the purpose of inspecting the premises and for no other purpose. It included:

Finally we make clear that our client will be entering the premises purely for the purpose of inspecting the same which our client is entitled to do pursuant to the terms of the lease. Our client will not be entering the premises pursuant to the forfeiture provisions within the lease or taking any form of possession of the premises …

67. On the same day a copy of the letter was sent to SSJ, the solicitors then acting for Mr Bibby.
68. On 17^th December 2008 SSJ replied to Manby Bowdler. The letter included:

…we understand that our client has made arrangements for the keys to be forwarded to … the Liquidator and presumably they will now be able to assist you.

69. When he gave evidence Mr Bibby said that he had never had the keys and that they were with Mr Baker. He spoke to Mr Baker at that time who reminded him of the conversation in July 2008 and said that he had returned the keys. Mr Bibby had a lot on his plate at that time and did not get back to his solicitor. He could not really explain why his solicitor answered in the terms set out above. It was not based on his instructions.
70. On 8^th January 2009 Manby Bowdler wrote directly to Mr Bibby requesting the keys. The letter made clear that the Landlord did not have the keys and that the keys were required for inspection purposes only. There was no intention to repossess. Mr Bibby did not reply to the letter. He was very busy at the time and forgot to deal with it. As far as he was concerned the keys had been returned.
71. On 15^th April 2009 Mr Leigh wrote direct to Mr Bibby. In the letter he stated that he had diarised 27^th April 2009 for a full site inspection. If this was not convenient he invited Mr Bibby to arrange a mutually convenient time. Mr Bibby did not reply and did not attend on 27^th April 2009 or any other date before October 2012.
72. It is clear from the passages cited above that the burden on this issue lies on Mr Bibby. On the balance of probabilities I do not accept that any letter was sent by the Landlord to Mr Bibby in July 2008 or that Mr Baker returned the keys at that time. In my judgment it is more probable that Mr Bibby is confused over dates. He was, after all, under some pressure at the time and on his own evidence very busy. I think it probable that the letter that Mr Bibby now remembers is the letter of 4^th December 2008 which he admitted seeing and was presumably forwarded to him by his solicitor. On receipt of that letter Mr Bibby duly contacted Mr Baker and asked him to send the keys to the Liquidator. Mr Baker posted the keys though it appears the Liquidator did not receive them. Mr Bibby informed his solicitor what he had done. SSJ passed the information on to Manby Bowdler in the terms of the letter of 17^th December 2008. There is some slight support for this view in Mr Baker's statement because he uses the expression – "After the administration". As set out above the Tenant did not enter into liquidation until 30^th July 2008 and thus, on Mr Baker's account the conversation took place after July 2008 whereas Mr Bibby suggested it was in July.
73. The terms of the letter of 4^th December 2008 make it clear that the Landlord is not taking possession of the premises or forfeiting the lease. In those circumstances it is quite unarguable that the request for the keys gave rise to the necessary estoppel to establish surrender by operation of law.

Clearing the site

74. On 8^th July 2008, three days before Mr Bibby circulated creditors but after the date when, according to Mr Bibby, trading had ceased, Mr Leigh visited the site and took some photographs of the common parts. Those photographs demonstrate a large number of pallets and two fork lift trucks on the common parts.
75. On 23^rd July 2008 Mr Leigh sent a Memo to Mr Hieber, the Managing Director of the Landlord which included:

It would appear from reports that I have received that [the Tenant] have abandoned their two Units although they have left a large quantity of pallets, rubbish and debris on site, which does require clearing as soon as possible due to being a fire risk as well as being an eyesore.

76. On 25^th July 2008 Mr Leigh sent faxed instructions to a firm (Sherringtons) to remove approximately 200 pallets from the site by 29^th July 2008 for the sum of £625 plus VAT.
77. On 4^th August 2008 Sherringtons submitted an invoice which indicated that the work was duly carried out on 28^th July 2008.
78. In my judgment the entering onto the common parts of Units 2 and 4 in the above circumstances is not an unequivocal act of taking possession by the Landlord. Not is it an act which would give rise to an estoppel such as to prevent the Landlord from denying that the leases were at an end.

Inspections

79. It is not in dispute that inspections were carried out at Units 2 and 4. There is no direct evidence as to the dates of the inspections but, as noted above, Mr Leigh made an appointment to inspect on 27^th April 2009. Some 3 years later, on 12^th January 2012 Mr Leigh reviewed the file , prepared and signed a Memo for Mr Ingram setting out details of 2 inspections that had taken place. The file did not contain any details of the inspections but it did contain a large number of photographs taken on the occasion of the second inspection.
80. Mr Bibby challenged the authenticity of the Memo but there is no reason to doubt that it represents Mr Leigh memory of events that had happened some 3 years earlier. There was no other evidence as to the inspections as Mr Bibby did not attend them and Mr Leigh has sadly died.
81. According to the Memo the first inspection was to allow access to inspect the electricity meter. At the same time the water main was isolated to stop a leak from the heating system. On that occasion Mr Leigh was met by a person he believed to be the operations foreman but may have been Mr Baker.
82. The second inspection was at the end of April 2009. It was a dilapidations inspection. Photographs were taken of the condition. Mr Leigh's recollection was that Unit 2 did not contain any plant, machinery, office furniture or records. Some racking was still present and can be seen in two of the photographs. [Mr Bibby's view was that 70% of the racking was present]. It was Mr Leigh's view that the Units had been abandoned.
83. Mr Leigh could not recall the Landlord being in possession of keys from any source. The Unit was found to be unsecured. He secured the property by fitting padlocks to the personnel door and internally to the roller shutter.
84. In my judgment neither of the inspections had the effect of terminating the tenancy. Access to read the meter is plainly not an unequivocal act of taking possession. The second inspection was subject to the correspondence that I have set out above which makes it clear that there was no intention to take possession. As Relvok makes clear the partial securing of the premises is not necessarily an act of taking possession. It is a question of fact whether the Landlord has done more than protect his interest. I find as a fact that Mr Leigh was doing no more than protect the Landlord's interest following the inspection at the end of April.

Marketing

85. It is common ground that the Landlord took steps to market Units 2 and 4 from December 2008. In evidence Mr Hieber accepted that he instructed a firm of Property Consultants, Reeves & Partners, to commence marketing in December 2008. He explained that he knew that he could terminate the lease of Units 2 and 4 whenever he wanted because of the substantial arrears of rent. Thus he was in a position to seek a new tenant.
86. Mr Bibby referred to the advertisement in the brochure prepared by Reeves & Partners, which offered Unit 3 (by assignment) in addition to Units 2 and 4. Mr Hieber explained that he was aware that the tenant of Unit 3 was looking to assign its lease. He denied that the form of the advertisement indicated that he had already taken possession of Units 2 and 4.
87. In my view the marketing of Units 2 and 4 was not an unequivocal act of taking possession by the Landlord. In circumstances where there were substantial arrears of rent the Landlord was in my view entitled to look for a new tenant and yet maintain its rights for rent against the old tenant and surety until a new tenant one is found. I derive no assistance from the reference to Unit 3 in the advertisement.

The racking

88. Mr Bibby was present at an inspection of Units 2 and 4 in October 2012. On that occasion the racking that had been present in Unit 2 in April 2009 had been removed. There is no evidence as to who removed it. Mr Bibby suggested it was removed by the Landlord. Mr Hieber denied this.
89. The burden of proving that the Landlord removed the racking falls on Mr Bibby. In my judgment he has not come within a measurable distance of discharging it.
90. In those circumstances the removal of the racking has not been established as an unequivocal act of the Landlord taking possession. Nor does it give rise to any estoppel.

The fork lift trucks

91. The position with the fork lift trucks is similar to that of the racking. The fork lift trucks did not belong to the Tenant. They were owned by a finance company. The photographs show that they were present on site in July 2008.
92. There is no evidence as to how they were disposed of. Mr Hieber denied that the Landlord was party to their disposal.
93. Mr Bibby sought to rely on an exchange of correspondence in September 2012 between himself and Narrow Aisle Ltd (the Manufacturer of one of the trucks).
94. On 22^nd September Mr Bibby wrote to Narrow Aisle a letter which included:

In November 2005 you supplied a Narrow Isle Flexi truck to [the Tenant]

In May 2008 [the Tenant] went into administration, following that date I was contacted by either the Sales Director or the Managing Director to tell me that he had seen the truck advertised at a Midlands dealer and was I aware of it, which I was not. The relevant Director said that they would investigate and found out it had been sold by the Landlord.

95. On 27^th September 2012 Mr Wooldridge, the Managing Director replied.

I can only confirm a vague recollection of the conversation we had. I cannot remember the Midland dealer's name and don't know where the truck is now. I did speak to Capital Asset at the time and I would have thought they would know the dealer involved.

96. To my mind Mr Bibby does not get within a measurable distance of establishing that the Landlord sold either or both the fork lift trucks. Mr Wooldridge was not called to give evidence. In that letter he does not confirm that the truck was sold by the Landlord nor does give any clue as to the basis for what he is alleged to have told Mr Bibby. No attempt has been made to contact the finance company.
97. Even if the Landlord had sold the fork lift truck the sale would not in my view have amounted to an unequivocal act of taking possession of the premises nor would it have given rise to any estoppel.

4.3 Conclusion

98. I therefore conclude that Mr Bibby has failed to establish that the leases were surrendered by operation of law or that the Landlord repossessed either Unit 2 or Unit 4.

5. Conclusion

99. I therefore conclude that this action succeeds. The Landlord is entitled to specific performance against the Surety in respect of Unit 2. The new lease will however be at the rent of £78,000 pa and not the increased figure contained in Manby Bowdler's draft. The Landlord is also entitled against the Surety to the sums claimed in respect of Units 2 and 4.
100. Hopefully the parties will be able to agree a form of order.