Option for a surrender or a break right?

Care must be taken to draw a clear line between a break right and a surrender agreement.

As was shown by the House of Lords in Barrett v Morgan (2000) 2 AC 264, there are fundamental differences between the two types of agreement. Whilst both agreements bring about the termination of a tenancy, one method of termination is unilateral, and the other is consensual. In general, unilateral termination of a lease (e.g. by the exercise of a break right) ends any derivative interests such as sub-leases, subject to rules of statutory security of tenure, whereas consensual termination (e.g. by way of a surrender) does not.

For one reason or another, the parties to a lease might be tempted to dress up what would otherwise be a break right as an agreement to make (or accept) a surrender. For example, where premises are sub-let, conscious that the exercise of a break right will terminate the sub-tenancies, the parties may try to re-cast a break right as a covenant for surrender, or as a covenant to accept a surrender. The case of PW & Co. Ltd v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch) casts doubt upon the effects of such agreements. In that case, Mr. Justice Neuberger stated (in obiter) that “where the surrender of the head-tenancy is effected pursuant to a unilateral right to require a surrender contained [in the lease]” the effect of the surrender would be to determine the sub-tenancies – as if a break had been exercised. He stated further that the distinction between a break and a surrender was a distinction between “a unilateral right to determine the head-tenancy contained in the head-tenancy itself [whether by way of break clause or right to require a surrender] and a bilateral agreement to determine the head-tenancy entered into after it had been granted”. Only the latter could properly be classified as an agreement for surrender, the completion of which would preserve the existence of the sub-tenancies.

One must therefore take care over the structuring of a unilateral termination clause. Surrenders and breaks are different, but the distinction between the two can become blurred.