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Forfeiture Clauses: the toughest legal muscle to exercise?

Forfeiture Clauses: the toughest legal muscle to exercise?

A forfeiture clause in lease allows the landlord to terminate the lease early and recover possession of the property before the term has ended based on a breach of the leaseholder’s covenant

A forfeiture clause in lease allows the landlord to terminate the lease early and recover possession of the property before the term has ended based on a breach of the leaseholder’s covenant

The clause is the tip of the iceberg

Most long leases have a forfeiture clause. It would be negligence to draft a lease without one. But this does not in reality mean that if a leaseholder stops paying rent or service charge a landlord can just walk in, take possession and change the locks as would be the case, say,  in the cut-throat world of commercial leases.

Unfortunately the mere existence of a forfeiture clause in a lease does not mean very much in the real world of residential leasehold law. It is in all reality just ‘tip of the forfeiture iceberg’. 

There are a number of legal protection mechanisms for the defaulting leaseholder both under statute and common law.

Statutory protections: what a relief

Statutory limitations on a landlord wishing to forfeit a lease depend on the reason for forfeiture.

Rents

If the reason is due to non-payment of rents due under the lease, be they ground rent or service charges, the landlord can in theory peacefully walk in and take possession, but only where

  • The property is unoccupied. Otherwise court proceedings must be used.
  • If ground rents are due, the landlord must have served the leaseholder with the required rent notice in a prescribed form under the Act, meaning that certain information must be presented to the leaseholder before it can be held to be in breach for non-payment (section 166 of CLRA 2002).
  • The amount of any service charge or administrative charge must first have been determined by the First tier property tribunal under Section 27A of the Landlord and Tenant Act 1985.
  • The amount of any rent (of whichever kind) must be greater than £350 or have been outstanding for more than three years (Section 167(1), CLRA 2002).  

Any other breach

  •  The landlord can peacefully re-enter if the property is unoccupied. Otherwise court proceedings must be used (Protection from Eviction Act 1977)
  • A section 146 Notice must have been served on the Leaseholder - only where the service charge or administration charge has not been reserved as rent
  • The leaseholder must have admitted the breach or the leaseholder must have obtained a determination from the First Tier Property Tribunal under Section 168 of CLRA 2002, and then must wait 14 days after any final determination before exercising the right
  • Landlords seeking to forfeit the lease for a breach of a repairing covenant, must be advised to pay particular regard to the Leasehold Property (Repairs) Act 1938. A section 146 served in this case must also include a statement of the leaseholder protections offered by that act and then the leaseholder is allowed to serve notice reserving the benefit of those protections. Landlords in this case must then first obtain leave of the court to continue the forfeiture claim, and in practice leave is only granted in very limited cases.   

 

  • Whilst most leases will commonly include a clause stating that ground rent is payable “whether or not demanded”, in practice, the provisions of CLRA 2002 in fact qualify this to the point it has little meaning. As leasehold law practitioners, the second thing to be done once the lease itself has been considered, is to seek from the landlord copies of the demands to ensure they have been served compliantly.

 

Relief from forfeiture

It is worth noting that even where forfeiture grounds are successfully established and all the statutory requirements are met, leaseholders can still apply to court and seek what is called relief from forfeiture. Essentially, the court has the discretion to set aside the forfeiture and case law has shown over a number of years that courts are far more likely to grant relief than not, where a leaseholder reacts promptly and reasonably and remedies the breach, including payment of all legal and professional costs.

Case law

In the recent case of Cheerupmate2 Ltd v Calce [2017] UKUT 377 (TCC), the leaseholder held a long lease of 900 years at an annual ground rent of £2 per annum. The lease contained the usual forfeiture clause. The landlord had served an intended ground rent notice under Section 166 the CLRA 2002 for unpaid ground rent totalling £11 but the form was incorrect and not as prescribed by the CLRA 2002. The leaseholder failed to make payment and the landlord sought to forfeit the lease and peaceably re-enter the property, on the basis that the arrears were for a period greater than three years.

The Upper Tribunal held that the landlord’s claim to forfeit the lease for non-payment of rent was legally invalid because of the incorrect form of notice used, the fact that the landlord had not given the leaseholder the requisite period under the forfeiture clause in the lease, and finally that the three years under the act only starts running from the date for payment specified under the lease, demonstrating acutely the importance of procedural correctness. The result of the incorrect payment due date under the notice had the result that the landlord had to in fact wait for a full three years before he could exercise the right.

The conclusion is that the effect of the CLRA 2002 is to delay the leaseholder’s liability for rent until the notice is served; the due dates under the lease is not enough and the Upper Tribunal ultimately held that the landlord had in fact trespassed rather than legally forfeited the lease. 

Conclusion: the impact on advising landlords 

The starting point to establishing the right to forfeit is the lease contract, but in reality a breach by a leaseholder of the terms of its lease is just the beginning. However, the statutory provisions that have developed over the years in relation to forfeiture illustrate that very often any express clause in the lease will be superseded or pale into insignificance. 

The recent case of CheerupMate2 has also shown that legal practitioners should be cautious in giving advice as to procedural correctness and the landlord’s prospects of successfully exercising their right to forfeit. In reality, the courts will do everything in their power and afford the defaulting leaseholder with every opportunity to remedy the breach and avoid this most drastic of sanctions.