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Forfeiture of Leases

Published on 18 Nov 2008 under category: article

James Brenan, Solicitor

1. Introduction

Forfeiture is one of the ways in which leases can be terminated. It can obviously be painful for the tenant, who stands suddenly to lose tenure of his premises. It can also be painful for the landlord, who will have to face a number of consequences:-

- losing a rental stream,


- paying business rates on the empty premises - which become due after 6 months of vacancy in respect of industrial and warehouse premises and after 3 months vacancy for all other commercial premises, and


- refurbishing those premises for re-letting.

In addition to those commercial consequences forfeiture is also something of a legal minefield. This summary is intended is intended to guide clients through the main problem areas but it is no substitute for specific advice on the facts of an individual case.

The rules covered here apply for both commercial and residential situations, but not agricultural. Additional rules for residential cases are summarised in Part 10 below. “You” are presumed to be a landlord, while these notes are impartial between landlords and tenants.

These notes are written by James Brenan of Cubism Law as general guidance. They are not a substitute for proper advice on the specific facts of any situation. No responsibility is accepted for decisions taken without first obtaining specific advice from retained solicitors.

2. Consider All Your Available Remedies

When you are faced with a serious breach or breaches of tenant’s duties forfeiture should be seen as one option among several, and weighed-up according to its costs and benefits. Other available remedies may include the following: -

- to levy distress through a certificated bailiff in respect of commercial rent arrears, which is particularly useful where the tenant holds valuable stock; this may also be possible against a sub-tenant under section 6 of the Law of Distress (Amendment) Act 1908.

- to sue for an injunction, which is always a discretionary remedy from the court - and usually not available to enforce a tenant’s repairing duty.

- to sue for a money judgment and then seek a statutory charging order over other property owned by the tenant.

- to bring a claim against an original lessee, for a pre-1996 lease, or the party who has given an “authorised guarantee agreement” under the Landlord and Tenant (Covenants) Act 1995 – complying with the notice rules under section 17 of that Act.

- to claim against an ordinary guarantor or surety, and

- to draw against any rent deposit money.

3. The Requirement of a Right to Forfeit

This is the first matter your solicitor will consider. Usually, you must rely on a forfeiture clause in the lease. Relevant aspects of the forfeiture clause are as follows: -

- how many days rent must be unpaid


- whether a formal rent demand needs to have been delivered (which is an elaborate procedure involving several visits to the premises)


- what other types of breach of duty are also enough to trigger the forfeiture right


- that peaceable re-entry is permitted.

Forfeiture is possible on the happening of any event which has been specified in a condition (and not just a covenant) of the lease. Also, a tenant’s denial of his lessor’s title gives a right to forfeit, but probably not any longer if the denial is made in good faith in a pleading during civil proceedings.

4. Rent Arrears

No prior notice under section 146 of the Law of Property Act 1925 is required or even appropriate.

Other money debts can be reserved as rent by a lease, such as service charges or the costs of repairs done in default by the landlord, and this has the advantage for the landlord of enabling forfeiture more easily if they are not paid on time.

Once the latest rent payment has fallen due you should have done nothing to acknowledge the tenant as your tenant, such as reminding them to pay rent – or this will stand as a waiver of the forfeiture right and means that you have to wait until the next payment is overdue. However, accepting rent arrears while current rent remains overdue is not a waiver of forfeiture.

It is important for a landlord not to allow arrears to accumulate because an assignee of a lease is not liable for arrears left owing by the assignor. Landlords can only preserve their right of forfeiture after an assignment of the lease by refusing to accept the notice of assignment and to do anything else that recognises the continuance of the lease.

5. Special Rules for Disrepair

A tenant’s breach of a repairing duty is treated as one that continues every day and therefore is not susceptible to a waiver by the landlord demanding rent or any other act of acknowledgment.

The Leasehold Property (Repairs) Act 1938 applies whenever a landlord intends to forfeit in respect of disrepair – whether by peaceable re-entry or civil claim - in every case where the term of lease was originally granted for 7 years or more and has at least 3 years left to run. The landlord is required to offer the tenant the opportunity of claiming this Act’s protection, which is done in the landlord’s section 146 notice - see below.

Once the tenant claims the protection of this Act, which he can do by letter within 28 days of receiving the section 146 notice, the landlord has to make a preliminary claim for the court’s permission before taking any further action. The five alternative grounds on which the court can, in its discretion, give permission are: -

(i) that immediate remedy of the disrepair is necessary in order to protect the value of the landlord’s reversion (and so evidence from a valuer will be needed),

(ii) that immediate remedy is needed in order to comply with a legal requirement, such as a repairs notice issued by the local authority,

(iii) where the tenant is not in occupation of the whole or part of the premises, that remedying the disrepair is required in the interests of the occupant,

(iv) the cost of immediate repairs is much lower than cost of delayed remedy, and

(v) other special circumstances that would make it just and equitable to give permission.

A common device for avoiding those restrictions from the 1938 Act is to include a “Jervis v. Harris clause” in a lease. One of these enables the landlord to enter premises and spend his own money on the necessary repairs and then claim that sum from the tenant as a debt. This can still be difficult to enforce if the tenant refuses access; then it becomes necessary to sue for an injunction, which is a discretionary remedy. It can also be expensive to enforce and uncertain – in case the tenant disputes the need for particular repairs or the tenant defaults in payment.



6. Other Non-Rent Grounds

These must all be preceded by a section 146 notice and they need to be considered carefully as to two questions: first, whether they are continuous or not and, second, whether they are remediable or not. Their continuous (or not) nature affects rules of waiver and their remediable (or not) nature affects rules of relief against forfeiture.

Types of breach that are continuous include: -

- disrepair,


- breach of user restriction, and


- breach of a prohibition against sharing of occupation.

Breaches that have been held to be non-continuous, or “one-off”, include:-

- unauthorised alterations,


- unauthorised sub-letting,


- unauthorised assignment without a licence,


- non-payment of rent for a particular period, and


- failure to allow access to the landlord or its agents on notice.

Most breaches are remediable, but ones that have been held to be irremediable are: -

- unauthorised sub-letting,


- unauthorised assignment,


- prolonged immoral user,


- bankruptcy of an individual or insolvency of a limited company, except if this were subsequently nullified by the court.

7. Waiver of Forfeiture as a Remedy

This is any action by the landlord in the face of a breach by the tenant that acknowledges the continuance of the tenancy. Acceptance of rent (whether or not with a disclaimer) is the classic example. Other actions, such as demanding access pursuant to the lease or issuing a licence under the lease, or sending in a Bailiff to levy distress for rent arrears, will have the same effect.

A demand for rent operates as a waiver of the right to forfeit for existing arrears but not for the instalment of rent being demanded.

A waiver of the remedy of forfeiture should not be confused with permanent waiver of a covenant or lease duty. It generally takes about 20 years’ obvious non-observance of a lease covenant to give rise to the permanent waiver of that covenant.

Waiver of a continuing breach is not nearly as serious a mistake as waiver of a breach of the non-continuous or one-off variety. A continuing breach is immediately un-waived by its continuation, whereas the other type - once waived – can never again be relied upon as a ground for forfeiture.

Forfeiture can still be reserved as an available remedy in “without prejudice” negotiations, but it is advisable to keep the period of such negotiations short

8. The Section 146 Notice

A notice under section 146 of the Law of Property Act 1925 should always be prepared and served on interested parties by the landlord’s solicitor. Interested parties include: the tenant, any mortgagee and any sub-tenant. An unauthorised assignee is still a tenant, in that the legal ownership of the lease will have passed, and so this party needs to be served with the notice.

This notice must do a number of things: -

- identify precisely the duty that has been broken,


- identify clearly and correctly the breach of duty,


- require remedy (if remediable) within a reasonable time,


- require monetary compensation within a reasonable time, and


- alert the tenant of any rights under the Leasehold Property (Repairs) Act 1938.

Always take advice whether this notice is needed – particularly regarding the “rent” exception and bankruptcy in certain situations.

Also take advice on the duration of “a reasonable time”, which is a question of mixed fact and law in every case. Where the breach is not remediable the reasonable time period to wait before you proceed to forfeit need only be 14 days. Where it is remediable it can be far longer.

Special rules of service and deemed receipt apply under section 196 of the Law of Property Act 1925.

Most leases provide for solicitors’ fees in preparing and serving such a notice to be recoverable as a debt from the tenant.

9. Special Rules for Residential Situations

Forfeiture is not possible in any of the following situations: -

- against a Rent Act protected tenant,


- against an Assured tenant under the Housing Act 1988,


- against an Assured Shorthold tenant under the same Act, and


- against a long leaseholder of a house who is claiming to enfranchise under the Leasehold Reform Act 1967.

Forfeiture of a long lease (21 years or more) is not allowed for arrears of rent or service charges or landlord’s administration charges unless the amount exceeds £350 or it has been owed for more than three years. Rent of residential premises cannot be recovered by any means, including forfeiture, until it has been lawfully demanded. There are now elaborate rules for rent demands in respect of residential premises, which are not summarised here.

For residential leases that were granted for a term of al least 21 years, forfeiture also needs to be preceded by an agreement of the tenant as to the fact of breach of duty or by a determination that there is a breach by a court or a Leasehold Valuation Tribunal and then 14 days must have passed.

Where the premises or part of them are someone’s residence forfeiture can only be pursued by court action. Peaceable re-entry is not allowed and would be a criminal offence.

10. Establishing the Breach of Covenant

Whether something is a breach is always a question of applying the correct meaning of the lease. If this is in dispute then it may be safer for a landlord to resolve that dispute through litigation before actually evicting the tenant. This can be done by issuing a claim for forfeiture before the court, as opposed to physically re-entering the premises.

11. The Act of Forfeiture: Peaceable Re-Entry

If the premises are left unoccupied – even just overnight or at the week-end – a landlord can re-enter the premises and fit new locks and so exclude the tenant from occupation. (The use of force towards any person on the premises would be a criminal offence.) As already stated, physical re-entry without a court order is not to be used in residential situations.

Peaceable re-entry is not the job of a bailiff. A landlord acting alone – although usually with a locksmith’s help - can carry out peaceable re-entry but it can be advisable to have a solicitor present. A notice of forfeiture should be affixed to the exterior of the premises. A copy of this notice should be sent to any other address for the tenant and to any mortgagee.

It is then trespass for the tenant to go back into the premises unless he has obtained relief against the forfeiture, as explained below. Many tenants nonetheless break back in and then it becomes necessary for the landlord to sue for their eviction as trespassers and for mesne profits, which may be more than the old rent.

12. The Act of Forfeiture: Court Proceedings

The other way to forfeit a lease is by the issue of a claim for possession by way of forfeiture, followed by service of the claim on the tenant and any mortgagee and any sub-tenant or occupier.

If the court later upholds the claim the forfeiture is deemed to have been effective from the date of service, which will mean that the tenant will be liable to pay mesne profits for occupation since then.

There are potential difficulties in enforcing tenants’ duties while the claim is pending, since the landlord alleges that the lease has finished. The parties’ grounds of dispute will then be set out by their statements of cases and managed by the court in order to facilitate a trial. It is often necessary in these cases to save costs by taking one point as a preliminary issue, such as whether there has been a breach of covenant at all, or whether a section 146 notice was validly given, or whether there has been a waiver of the forfeiture right.

In cases of rent arrears the court’s order will always give the tenant 28 days in which to pay before the order for possession becomes effective.

13. Relief Against Forfeiture

Tenants must act fast once they have suffered forfeiture if they want to retrieve the situation. They first have to remedy the breach and pay the landlords’ costs – assuming that liability is admitted. Those costs stand always to be assessed on “the standard basis” as opposed to “the indemnity basis” – which means among other things that they must be proportionate to the sums in issue.

If the tenant cannot remedy the breach without gaining entry to the premises, for example by undoing some unauthorised alterations, then the tenant can undertake – i.e. promise formally in writing through solicitors – to do so within a short time of readmission to the premises. If a tenant does all those things and the landlord does not readmit him then he must sue for “relief against forfeiture”. It may be necessary for the tenant to tender the necessary funds to demonstrate his ability and willingness to pay.

Relief from forfeiture applications generally succeed if they are validly brought and accompanied by payment of any arrears of rent within 6 months of the date of forfeiture but the rules here are complex and always needful of expert advice.

Sometimes landlords can defeat applications for relief even if validly brought within the six months. These situations can arise where, for example, the tenant has a history of deliberate breaches of duty, or the contractual term of a business lease has expired and the landlord would have a good ground of opposition to the granting of a renewal lease under the Landlord and Tenant Act 1954, or the landlord has already re-let the premises or otherwise acted to its detriment. The full list of factors that a court considers when exercising its discretion in these situations is too long to be set out here.

This power of the court to grant relief cannot be avoided by express provision in a lease.

14. Rights of Sub-Tenants, Assignees and Mortgagees

Unlike the case with surrender of a lease, forfeiture of a lease involves the destruction of all rights that feed off it – and so sub-lessees, mortgagees, assignees and occupiers all stand to lose their interests in the premises.

These parties can apply for relief against forfeiture and the Court has a broad power to grant it on such terms as it sees to be just. Typically, a sub-tenant will have to make good his landlord’s defaults and to enter into a new lease with the head landlord that contains the same duties as his landlord owed: this can often involve taking on new rent and repairing duties if the sub-tenant wishes to remain in the premises.

Hence it is therefore always an inherently risky position to be the sub-tenant or mortgagee of leasehold premises.

15. The Effects of Various Insolvency Situations

The following different possible types of insolvency situations affecting tenants need to be borne in mind: -

- Voluntary Liquidation of a Company

Peaceable re-entry is not affected. The liquidator can still apply for relief against forfeiture or to stay or restrain forfeiture by civil action.

- Compulsory Liquidation of a Company

A liquidator may challenge forfeiture by peaceable re-entry, and leave of the court is required before you can forfeit by a civil action.

- Company in Administrative Receivership

This does not affect either method of forfeiture.

- Appointment of a Law of Property Act Receiver

This does not affect either method of forfeiture.

- Company in Administration

No forfeiture action, whether by peaceable re-entry or by civil claim, is permitted without consent from the administrator or the court, and where the court gives such consent this will be on such terms as the Court may impose.

- Bankruptcy of an Individual

Peaceable re-entry is not affected. Forfeiture by civil action is only possible if you have prior leave from the court.

- Voluntary Arrangements for Individuals

Peaceable re-entry is not permitted. Forfeiture by civil action is allowed with the court’s permission.

- Voluntary Arrangements for Companies

Peaceable re-entry is not allowed without permission of the court (or the Administrator) when a “small company” or Administration order is in force.

- Voluntary Arrangements for Individuals

Peaceable re-entry is not allowed. Forfeiture by civil action is only allowed if the court has given permission.

In the above situations where the court’s permission is needed before a landlord is allowed to forfeit the lease of a tenant in some form of insolvency, the question naturally arises as to how the court approaches its considerations of applications for such permission. The court will always perform a balancing exercise between the claims of the landlord and other creditors, bearing in mind the purposes of the insolvency regime that applies, the time needed to satisfy those purposes and the parties’ conduct but giving due weight to the landlord’s proprietary interests. This comes out of the Court of Appeal’s decision in Re Atlantic Computer Systems [1992] Ch 505.

16. Time is of the Essence

The above summary of the law shows that there are numerous ways in which landlords can be put at serious disadvantage if they let time pass once a right to forfeiture has arisen. In particular, if your tenant is in such financial straits that it cannot pay the rent on time then the chances are that it may well soon go into one of the above types of insolvency where your rights to forfeit would be destroyed or impeded.

It is therefore sensible to make a thorough survey of your available remedies and to take appropriate action as early as possible.



17. Wrongful Forfeiture

To re-enter premises in the belief that you are forfeiting them only later for it to be shown in Court that you were wrong to do so – for any of the above reasons - is not a forfeiture at all. Rather, it is a trespass and a very serious breach of the landlord’s duty to give “quiet enjoyment” of the premises. It can give rise to a heavy liability to pay compensation and costs to the tenant.

In residential situations wrongful forfeiture of a tenancy can result in a liability to pay damages to the tenant based on the profit gained by the landlord, under sections 27 and 28 of the Housing Act 1988.


 

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