Update: residential property

In these troubled times it is more important than ever that landlords of residential properties should keep their tenants on the hook. With this in mind all landlords should take great care with the steps they take if a tenant vacates their property during the term.

Surrender: actions speak louder than words

In the recent case of Artworld Financial Corporation v Safaryan (2009) EWCA Civ 303, the Court of Appeal made it clear that the question of whether or not a landlord has accepted a surrender of a lease will depend on the landlord's actions, not on the landlord's intentions or what the landlord communicates to the tenant at the time.

In this case a substantial house in London's Holland Park was let to members of the Safaryan family for a term of three years. Less than halfway through the term, the family moved out and returned the keys as they were unhappy with the state of the property. The landlord claimed that the tenants had no right to surrender the lease and the landlord's solicitors made it plain in correspondence that the landlord regarded the lease as continuing and was unwilling to accept a surrender.

The landlord commenced proceedings claiming rent for the remainder of the term. The tenant defended the proceedings on the basis that the landlord had acted in such a way as to be taken as having accepted a surrender of the lease, irrespective of what the landlord was stating in correspondence. The Court of Appeal made it clear that the acceptance of a surrender of a lease by operation of law occurs where a landlord acts in a way which is clearly inconsistent with the lease continuing. The landlord's intention is irrelevant.

It was accepted by the court that, if a tenant vacates during the term, there are various actions a landlord can take to protect its interests that do not amount to accepting a surrender. Accepting the return of the keys 'without more' will always be equivocal, as will any act of the landlord which is consistent with its rights under the lease; such as entering the property to inspect or repair, or to protect and preserve (such as installing security measures).

Even the landlord taking steps to re-let the property will not necessarily give rise to acceptance of a surrender by operation of law as it could be 'for the potential benefit of all parties'. If the landlord, however, as it did in this case, goes further and uses the property for its own benefit by occupying the property, moving furniture back in and re-hanging curtains that had been removed for the letting, and using the drive to park the landlord's cars, this is inconsistent with the continuation of the lease and gives rise to acceptance of a surrender by operation of law. The court looks at the cumulative effect of the acts rather than each one in isolation. The court agreed with the tenant that the landlord's actions were inconsistent with the tenant still having a right to occupy the property and as a consequence the landlord's claim for the balance of the rent failed.

In the current challenging climate many tenants may be looking for ways to vacate rented property to cut their costs. Clearly when faced with a disappearing tenant a landlord will want to check the property's condition and ensure that it is secure; but this case highlights that landlords must take care not to overstep the mark and inadvertently by their actions accept a surrender of the lease, thereby thwarting any attempt to enforce continuing liabilities against the tenant.

Signed and sealed'¦ or not?

In property transactions solicitors are regularly asked to sign contracts on behalf of clients. The recent case of McLaughlin v Duffill (2009) EWCA Civ 1627 in the Court of Appeal looked at whether authority to sign a contract on behalf of the seller for the sale of land needs to be in writing to comply with s.2 of the Law of Property (Miscellaneous Provisions) Act 1989, which requires that a contract for the sale of land must be in writing and incorporate all the terms that the parties have agreed in one document, or in each document to be exchanged, and be signed by or on behalf of each party.

In this case the seller was unsuccessful at auction, so the agent put the property on the market at the reserve price. Contracts were exchanged to sell the property at a price significantly lower than the reserve price and, although it was a finding of fact that the agent had been given actual authority to sign the contract in various telephone conversations with the seller, she claimed that the contract was void as it did not comply with s.2, because her authority to sign the contract had been given orally rather than in writing. The Court of Appeal found that there was nothing in s.2 to suggest that written authority was required to enable an agent to sign a contract to buy or sell land.

Despite the Court of Appeal's judgment in this case, if a solicitor is requested by a client to sign on their behalf, it is prudent to get the authority in writing, signed by the client, with a copy of the contract and, where circumstances allow, attach a letter to it setting out the consequences of entering into the contract and explaining its terms. Clearly it will be for the individual to judge how well they know their client and whether they will accept faxed or emailed authority. Taking precautions should, however, help to minimise the risk of being liable for damages for breach of warranty of authority.

Another case on signing documents late last year continues to cause concern, so much so that a joint working party of the Law Society and the City of London Law Society has recently issued 'Guidance on the Execution of Documents at a Virtual Signing or Closing'. The guidance can be found at https://www.citysolicitors.org.uk/ FileServer.aspx?oID=571&lID=0. It has been produced to address the problems thrown up by the not uncommon practice of signature pages of documents being drawn up and executed in advance and then subsequently attached to the final agreed form of document, so as to expedite the transaction in time-pressured circumstances.

This practice was considered by the High Court in R (on the application of Mercury Tax Group Limited and Another) v HMRC (2008) EWHC 2721(Admin), in which it was held that the signature on an incomplete draft deed (or contract) cannot subsequently be transferred to the final version of the document to effectively execute it. This decision has caused widespread concern and transactions have been slowed down by the more careful approach of waiting for hard copy versions of documents to be signed, which has probably only been possible logistically because of the current slowdown in the market.

To address this concern, the Law Society guidance has been produced to give 'a (non-exhaustive) range of options available to parties when executing documents' where some or all of the signatories are not physically present 'to help parties who wish to take a cautious approach in the light of Mercury'. The steps outlined in the various options to a greater or lesser extent will reflect the prudent current practice of cautious solicitors; but the guidance notes serve as a useful reminder.

Service charge: take notice

A recent case in the Lands Tribunal is a timely reminder of the care that must be taken to ensure that a notice under s.20 of the Landlord and Tenant Act 1985 is properly served in order for a landlord to recover the cost of works via service charge. In Rita Akorita v 36 Gensing Road Limited [2009] EWLands LXR_16_2008, the tenant of a flat had moved out and had sublet it to a third party. The tenant had given a correspondence address to the landlord's previous managing agents, who unfortunately failed to pass it on to the new managing agents. As a consequence, the letter enclosing the s.20 notice was sent to the flat she had moved out of.

When the landlord sought to recover service charge in respect of works that had been carried out to the building, the tenant claimed that she had not been properly served with the s.20 notice and refused to pay the service charge. On appeal from the Leasehold Valuation Tribunal, the Lands Tribunal found in favour of the tenant and held that the notice had not been served in accordance with the lease which required that it should either be sent to the tenant at her last known place of abode or business or left at or affixed to the flat. The Lands Tribunal agreed with the tenant that it was not possible to combine the two. It would have been good service to have affixed the notice to the flat, but was not good service to send it to the flat as this was not her last known place of abode or business.

When consulting with tenants in connection with proposed works, landlords and managing agents must take great care to ensure that any notices are properly served. If a landlord fails to carry out the full consultation procedure in the required manner, it will not be able to recover the cost of works via service charge above the level of the statutory minimum amount (currently £250 per tenant). A prudent landlord or managing agent should always check at the Land Registry or Companies House that the address they have for a tenant is correct.