Legal Briefing

Forfeiting leases: a practical overview

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Real estate | 13 November 2015

Forfeiture is a means for a landlord to terminate a lease, in the event of some default by the tenant. The right must be conferred expressly: there must be a ‘forfeiture clause’ or a ‘proviso for re-entry’. It can be contrasted with a break clause exercisable by a landlord, which also confers a unilateral right to terminate, but not upon some default of the tenant (such as a right of forfeiture). The difference is that it is only where the landlord is exercising a right to forfeit the lease that the tenant can apply for relief against forfeiture: see Richard Clarke & Co v Widnall [1976].


STEPS TO TAKE BEFORE FORFEITING A LEASE

Contractually, a landlord need look only to the proviso for re-entry because this sets the parameters of the landlord’s right to forfeit. Conventionally, it will apply to any breach of covenant by the tenant, except that, where rent is concerned, the right to forfeit will usually only arise 14 or 21 days after the rent falls due. It might also extend to matters which do not involve any breach of covenant, such as the entry by the tenant into some form of insolvency process.

Statute has superimposed onto the contractual framework a somewhat complicated series of steps which have to be taken. These are summarised below.

  1. A notice must be given under s146 of the Law of Property Act 1925 which (a) informs the tenant of the breach of covenant, (b) gives the tenant a reasonable time to remedy any covenant which is capable of remedy (but need not state what that reasonable time is) and (c) requires the tenant to pay compensation for the breach. The landlord cannot forfeit until a reasonable time has elapsed from the giving of this notice without the breach having been remedied, where the breach is capable of being remedied. However, this does not apply where the only ground for forfeiting is arrears of rent.
  2. Where the ground for forfeiting is a breach of the tenant’s repairing obligations, the landlord must comply with the additional requirements of the Leasehold Property (Repairs) Act 1938, which require additional wording to be inserted into the section 146 notice, with provision for the tenant to serve a counter-notice claiming the benefit of the Act, in which case the landlord must go through a preliminary application for the leave of the court to forfeit. This will only be given if one or more of the statutory grounds is established. This does not apply where less than three years remain of the term.
  3. In relation to a lease of a dwelling, s168 of the Commonhold and Leasehold Reform Act 2002 prevents the landlord from even serving a section 146 notice without either the tenant’s agreement that a particular breach has occurred, 
or the determination of the court or 
the First Tier Tribunal that a breach 
has occurred.
  4. Where the tenant has entered into various forms of insolvency process, the leave of the court is required before the lease can be forfeited. This applies where the tenant is in administration (Insolvency Act 1986, Schedule B1, paragraphs 45 and 46); where the tenant is in liquidation (Insolvency Act 1986, s130(2)); where there is a voluntary arrangement in place under the Insolvency Act (s252, for individuals and schedule A1, paragraph 12, for companies) and where a bankruptcy order has been made in respect of an individual (Insolvency Act, s285(3)).

HOW IS A LEASE FORFEITED?

There are two ways for a landlord to forfeit a lease. Physically taking back possession of the premises (often described as ‘peaceable re-entry’) and issuing and serving proceedings. Peaceable re-entry is often favoured by landlords, but it ought to be viewed with caution. There are a number of potential traps for a landlord:

  1. Under s6 of the Criminal Law Act 1977, any person who, without lawful authority, ‘uses or threatens’ violence for the purpose of securing entry onto premises is guilty of an offence if (a) there is someone present on the premises who is opposed to the entry and (b) the person using or threatening violence knows that that is the case. Curiously, though, the fact that the entry involves the commission of a criminal offence under this section does not invalidate the entry as an act of forfeiture: Hemmings v Stoke Pages Golf Club [1920].
  2. Where premises are let as a dwelling, it is unlawful to exercise a right of re-entry otherwise than by court proceedings, where any person is lawfully residing in the premises or part of them: Protection from Eviction Act 1977, s2. This applies to commercial premises where there is some residential element, however small or inconsequential: Pirabakaran v Patel [2006].
  3. If the tenant leaves chattels on the premises, unless there is a provision in the lease which provides that title to those chattels will vest in the landlord, they will remain the property of the tenant and the landlord risks becoming liable for trespass or conversion if they remove them.
  4. Where there is a good chance that the tenant will seek and obtain relief from forfeiture, the landlord might find themselves, fairly swiftly, on the wrong end of an application for an interim injunction to permit the tenant to 
re-occupy the premises pending the final determination of a claim for relief from forfeiture. Such an injunction is likely to be granted where the tenant indicates either a willingness and ability to remedy the breach or where there is a credible argument that the landlord was not entitled to forfeit.
  5. Even if the landlord and tenant agree that the breach has been remedied, relief from forfeiture can only be conferred by the court. If the landlord and tenant purport to agree between themselves, without a court order, that the tenant shall have relief from forfeiture, their agreement will create a new lease. They cannot revive the forfeited lease. As between the landlord and tenant this probably does not matter, but it has important consequences in relation to guarantors and former tenants whose contractual liability will end.

Conversely, where there is a strong case for forfeiting a lease and a tenant who might not have the appetite for an application for relief, exercising the right to peaceable re-entry is much quicker, cheaper and more certain for a landlord than bringing possession proceedings in the County Court.

WAIVER

Where the right to forfeit arises, the landlord is put to an election. They must either terminate the lease by forfeiting it or elect to keep it afoot, thereby affirming it.

In order to affirm the lease/waive the right to forfeit, the landlord must:

  1. know that the right to forfeit has arisen;
  2. unequivocally recognise the existence of the lease; and
  3. communicate that recognition to 
the tenant.

Once an election is made, it cannot be revoked. So, if the landlord affirms the lease then they instantly loses their right to forfeit for all breaches down to the affirmation. Conversely, if the landlord elects to forfeit and the tenant accepts the termination of the lease, the landlord cannot then go back on their election to resurrect the lease (that can only be done by an application by the tenant for relief from forfeiture).

KNOWLEDGE

The right to elect only arises when the landlord has knowledge of the breach. This includes knowledge of an agent which can be imputed to the landlord (eg where managing agents have control over the collection of rent/the management of the premises). The extent to which a landlord is put to their election where they have the means of knowledge but do not follow up a line of enquiry remains unclear (see Woodfall at 17.094.3 and the various cases cited).

UNEQUIVOCAL RECOGNITION OF LEASE

The landlord will only waive the right to forfeit where they act in a way which amounts to an unequivocal recognition of the lease. The test is fact specific, so where a particular act might amount to a waiver in one case, in different circumstances, the same act might be treated differently.

The one exception is the acceptance of rent. Historically, where the landlord accepts rent which has fallen due after the right to forfeit accrued, that will waive the right to forfeit. Where rent is demanded but not then accepted, the demand itself is likely to be sufficient to waive the right to forfeit for breaches which occurred prior to the rent which is demanded falling due (see eg Segal Securities v Thoseby [1963], where a demand was held to waive the right to forfeit, at first instance, but see also Expert Clothing v Hillgate House [1986], where it was doubted by the Court of Appeal, although assumed to be correct; the point was left open in Greenwood Reversions v World Environmental Foundation [2009]; Lewison J concluded that, at first instance, the matter was settled, in Ultraframe Ltd v Fielding [2005] at paragraph 1449 and that an unequivocal demand would, indeed, waive the right to forfeit).

Where the landlord accepts rent which fell due after the tenant’s breach of covenant, is it not clear whether the landlord must also have been aware of the breach at the time the rent fell due. So, if the sequence is (1) breach, (2) rent falls due, (3) landlord learns of breach, (4) rent accepted, does the landlord waive the right to forfeit for the breach? In Osibanjo v Seahive Investments Ltd[2009], the question arose, but ultimately was not necessary for the court’s decision. Nevertheless, Mummery LJ and Rix LJ offered their obiter views. Mummery LJ took the view that there is no waiver if the knowledge of the breach comes after the rent falls due, even if it precedes the acceptance of that rent. Rix LJ took the view that this would amount to a waiver because the important question is whether the landlord has sufficient knowledge when the rent is accepted. The approach of Rix LJ appears more logical, but it is not entirely clear which would be accepted if the issue were to arise for decision in a future case.

RELIEF FROM FORFEITURE

Jurisdiction

Historically, before the fusion of law and equity in 1873, the courts of common law enforced forfeiture clauses strictly and it was only in the courts of equity that relief from forfeiture was available. The courts of equity gradually built up the foundations of the present jurisdiction to relieve against forfeiture in circumstances where the landlord is compensated for any loss arising from the breach of covenant. For a historical account and the basis of the equitable jurisdiction, see the speech of Lord Wilberforce in Shiloh Spinners v Harding [1973].

Today, the courts’ jurisdiction to relieve against forfeiture as between landlord and tenant is purely statutory. There is no residual jurisdiction to relieve against forfeiture in circumstances which do not fall within the various statutory criteria: Billson v Residential Apartments Ltd [1992] (CA, reversed on other grounds).

Forfeiture for breaches other than rent

Section 146(2) of the Law of Property Act 1925 confers the court’s jurisdiction to grant relief from forfeiture to a tenant whose lease is forfeited for any reason other than non-payment of rent (s146(11)). The jurisdiction arises where a landlord is ‘proceeding’ to enforce a right of re-entry. A landlord begins ‘proceeding’ for this purpose when they serve a section 146 notice, whereupon the tenant can apply to the court for relief from forfeiture, even if the landlord has not, yet, forfeited the lease (Pakwood Transport v 15 Beauchamp Place [1978]). The landlord continues to ‘proceed’ to enforce the right of re-entry for this purpose, until possession is recovered pursuant to an order of the court, at which point the right of the tenant to apply to the court for relief is lost:Billson v Residential Apartments. At that point, it is only if the tenant is able to impugn the forfeiture itself (eg to show that there were no grounds for forfeiting or that the landlord had waived the right to forfeit) that the tenant can recover possession. However, if the landlord peaceably re-enters without bringing proceedings, the landlord continues to ‘proceed’ to exercise their right of re-entry for the purposes of s146(2), so that the court retains jurisdiction to grant relief under s146(2): Billson v Residential Apartments.

The subsection does not set any parameters for the exercise of the court’s discretion and it has been said that it is the ‘widest discretion’ (Chatham Empire Theatre v Ultrans [1961]). However, the purpose of the remedy is to secure compliance with the tenant’s covenants. It is not to secure a windfall for the landlord by recovering possession before the natural termination of the lease.

Where the breach is ‘wilful’, the court might be less inclined to grant relief from forfeiture (Shiloh Spinners v Harding). However, the fact that a breach is ‘wilful’ does not mean that the court should only grant relief in exceptional circumstances; rather, it is one of the factors to take into account in the exercise of the court’s discretion and the weight to be attributed to the tenant’s state of mind will depend on the circumstances of each case: Southern Depot v British Railways Board [1990]. Recently, in Freifield v West Kensington Court Ltd [2015], the Court of Appeal affirmed the orthodox position that a wilful breach does not create any presumption against granting relief from forfeiture. The Court, in that case, reversed the decision of the trial judge refusing relief from forfeiture on the ground that the judge had placed undue weight on the wilfulness of the breach (an unlawful subletting) without attributing any weight to the windfall to the landlord obtaining possession of premises which had been subject to a long lease.

Terms of relief: forfeiture for breaches other than non-payment of rent

The statutory jurisdiction to relieve against forfeiture does not circumscribe the terms on which relief should be granted. However, the general position is that relief should 
only be granted on terms which put the landlord in the position in which they would have been if the tenant had not committed the breach of covenant on which the forfeiture was based: Egerton v Jones [1939]. This will usually (but not invariably) involve payment of the landlord’s reasonable costs on the indemnity basis: Patel v K & J Restaurants [2011].

Forfeiture for non-payment of rent

Where a lease is forfeited for non-payment of rent, the court’s jurisdiction to relieve against forfeiture retains, in part, its historic origins, deriving from the court’s inherent equitable jurisdiction.

In the County Court, where forfeiture proceedings are brought on the sole 
ground of arrears of rent, the court 
is required, by s138, to adopt the 
following approach:

  1. Was the landlord entitled to forfeit (were there arrears of rent/was the right to forfeit waived)?
  2. If so, the court must make an order for possession, but subject to relief on payment of all arrears of rent, interest and costs within at least 28 days.
  3. The court can consider extending the 28-day period. The tenant can apply for subsequent extensions after the initial order is made under s138(4).

Section 138 applies only where a ‘lessor is proceeding by action’ in the County Court. Where a landlord peaceably re-enters for non-payment of rent, the County Court’s jurisdiction to relieve against forfeiture is exercisable under s139(2), and it has power to relieve on the same terms as the High Court.

The High Court’s power to relieve against forfeiture for non-payment of rent is contained in s38 of the Senior Courts Act 1981. Where there is a peaceable re-entry and the tenant applies for relief in the High Court, it is the court’s inherent jurisdiction which applies (Billson v Residential Apartments). The High Court has more discretion than the County Court, whose powers are constrained by s138, although relief will almost invariably require the arrears to be paid with costs. There might be rare cases where the High Court would refuse relief, even if the tenant is willing to pay, by reference to other serious breaches which might blight the premises (see Woodfall at paragraph 17.182), but in light of the decision of the Court of Appeal in Thomas v Ken Thomas [2006], it is questionable whether a tenant who offers to pay all of the arrears for which the lease was properly forfeited can be required to pay additional arrears in order to obtain relief from forfeiture.

The tenant must apply for relief in the 
High Court within six months of the execution of a writ of possession following the forfeiture of the lease for non-payment of rent: s210, Common Law Procedure Act 1852. However, this does not mean that the court must entertain any application within six months of execution. So, if the landlord is led to believe that the tenant will not seek relief and re-lets the premises to a third party, the tenant’s delay might preclude the tenant from obtaining relief: Silverman v AFCO (UK) [1988]. Where the landlord peaceably re-enters, the six-month time limit does not apply, but is taken as a strong guide: Thatcher v LH Pearce & Son Contractors [1968].

By Adam Rosenthal, barrister, 
Falcon Chambers.