FREE CHAPTER from ‘A Practical Guide to Forfeiture of Leases’ by Mark Shelton

CHAPTER ONE – FORFEITURE OF LEASES – OVERVIEW

This chapter describes the law of forfeiture of leases in outline, summarising its main features.

In reading this book, it will be helpful to have a clear idea of the basics of the law of forfeiture, and some of its main features. We begin, therefore, by outlining forfeiture of leases in broad terms. This chapter is a summary and therefore necessarily a simplification to some extent. Fuller discussion of the matters summarised here follows in subsequent chapters.

Nature of forfeiture

Forfeiture simply means termination of the lease by the landlord, for some default by the tenant. Generally, this right is only available to the landlord if the lease expressly so provides. Most commercial leases will contain forfeiture clauses in more or less standard terms, entitling the landlord to forfeit (a) where arrears have been outstanding for a specified, short ‘grace period’, (b) where the tenant is in breach of any other covenant in the lease, and (c) where the tenant has become insolvent.

Although that is a simple enough idea, the accreted caselaw and legislation concerning forfeiture has complicated matters considerably. The Law Commission has observed of the law of forfeiture that “it is complex, it lacks coherence, and it can lead to injustice”. The Commission’s draft Landlord and Tenant (Termination of Tenancies) Bill was first published in 1994, and republished with some changes after a further consultation in 2006. It proposes abolishing the law of forfeiture completely, to replace it with a new statutory scheme. Several of the problems with the existing law will be apparent from this brief overview.

Waiver of the right to forfeit

Where a landlord has a right to forfeit, it follows that it is for the landlord to decide whether or not to exercise it. That decision involves many commercial factors, and circumstances may sometimes point away from forfeiture. On the other hand, it can be a very valuable property right. The landlord may be able to market the property advantageously if it can recover possession from the tenant, or may count on forfeiture as the most effective way of persuading the tenant to put right whatever breach of covenant it has committed.

One of the most problematic aspects of the current law is that this valuable right may easily and inadvertently be lost, or ‘waived’, by the conduct of the landlord or its agents. Any conduct which acknowledges the continuing existence of the lease (such as continuing to demand rent) will be treated as a choice to allow it to continue, and will amount to a waiver. The first priority for the landlord, therefore, upon realising that it has a right to forfeit, is to ensure that all those dealing with the tenant on its behalf understand that they should do nothing which may amount to a waiver.

The risk of waiver ends when the landlord proceeds to forfeit the lease, since once the right has been exercised it can no longer be waived. Equally the risk ceases to be a concern once the landlord takes a firm and settled decision not to forfeit.

The law makes a distinction, as regards waiver, between breaches of covenant which are considered to be ‘continuing’, and those which are ‘once-and-for-all’. If for example a tenant assigns the lease to a third party without the required consent from the landlord, that is a completed ‘once-and-for-all’ breach as soon as the assignment has been completed. If the landlord waives its right to forfeit in relation to that breach, then it is gone for all time. By contrast, a right to forfeit arising from a continuing breach of covenant (such as a failure to keep in repair) may be waived, but because of the continuing nature of the breach a fresh right to forfeit arises immediately. Waiver is therefore less of a concern in relation to continuing breaches, but a cautious landlord will still try to avoid it.

In practical terms, avoiding waiver means putting a stop on the rent account, and avoiding any discussions or correspondence with the tenant until such time as either forfeiture has been effected or the landlord has taken a firm decision not to forfeit. The risk of waiver thus distorts or prevents dialogue between landlord and tenant, and stands in the way of sensible negotiated resolutions to disputes.

Section 146 notice

Assuming that the landlord avoids waiving the right, and wishes to proceed to forfeiture, there is an important formality which may need to be complied with first, depending upon the nature of the breach of covenant giving rise to the right to forfeit.

If the tenant’s breach of covenant is a simple failure to pay rent, there is no requirement for the landlord to give the tenant any warning before forfeiture. This is an instance of the importance which the law has always attached to rent. Forfeiture is often referred to by judges as the ultimate security for the payment of rent.

In the case of other breaches of covenant, the landlord cannot forfeit without first serving on the tenant a warning notice under s.146, Law of Property Act 1925. This ‘s.146 notice’ must identify the breach of covenant, require the tenant to remedy it within a reasonable time, require the tenant to pay compensation for the breach, and will warn the tenant that unless it complies the lease will be forfeited.

If the landlord does not follow this procedure correctly, any recovery of possession which follows will be unlawful, and will potentially expose the landlord to a claim for substantial damages, or at least payment of the tenant’s legal costs. The landlord must be particularly careful (a) to identify the breach of covenant accurately in the drafting of the notice, and (b) to allow a reasonable time for remedying of the breach to elapse before forfeiting the lease.

What is a reasonable time must always be a question of fact in all the specific circumstances. It may be very short: discontinuing an unlawful use of the premises, for example, may be done very quickly. On the other hand, remedying a breach of covenant which involves the physical condition of the premises, and may require significant works to be carried out, could take months. The landlord will wish to err on the side of caution.

The law makes a distinction between breaches which are capable of being remedied, and breaches which are ‘irremediable’. In simple logic, where a breach of covenant is irremediable, the reasonable time which must be allowed to a tenant to remedy the breach should be nil. Even in the case of an irremediable breach, though, the courts have suggested that the landlord should still leave at least two weeks between service of the s.146 notice and the actual forfeiture.

Service of the s.146 notice does not end the risk of waiver, and the landlord must still be careful to avoid this, right up to the point of the actual forfeiture.

Methods of forfeiture

The landlord must also decide what method of forfeiture to employ. In order to forfeit, the general principle is that the landlord must act so as to show an unequivocal intention to end the lease and recover possession. There are conventionally two ways of doing this: (a) serving court proceedings claiming possession; and (b) recovering possession physically, typically by changing the locks. The latter option is known as ‘peaceable re-entry’. The choice as to which method to adopt is entirely unfettered (save that circumstances may make it impossible for the landlord to effect a peaceable re-entry without committing one of the criminal offences referred to below).

From the tenant’s point of view, while possession proceedings would of course be unwelcome, the real threat is that of peaceable re-entry. It is a draconian measure, and particularly so if the landlord is forfeiting in reliance upon arrears of rent, when no warning need be given. The tenant may be able to obtain an interim injunction requiring the landlord to allow them to resume possession, but this will be expensive and highly disruptive.

There are restrictions on the exercise of peaceable re-entry. It is a criminal offence to recover possession in this way if any part of the property is let as a dwelling, which means that it should only ever be used in relation to completely non-residential premises. It is also a criminal offence, if there is any person present on the premises who is opposed to the landlord recovering possession, to do so by means of violence against the person or property. As a consequence, peaceable re-entry is usually effected at anti-social hours, when the landlord can count on there being nobody present. A further consequence is that the tenant may forestall peaceable re-entry by ensuring that there is a 24-hour presence at the property.

Peaceable re-entry also presents practical complications as regards clearing the property of the tenant’s goods in order to re-let, and is therefore an option which requires some careful thought on the landlord’s part.

Serving possession proceedings is subject to no such restrictions, though of course it is slower, more expensive, and has less impact upon the tenant than peaceable re-entry. The peculiarity of this method of forfeiture is that the landlord will have made its demonstration of unequivocal intention to terminate the lease once it has served proceedings; at that point, the lease is forfeited. Of course, the ultimate outcome of the proceedings may not be success for the landlord, and this type of forfeiture is therefore of a provisional nature.

The period while proceedings are taking their course towards conclusion is known as the ‘twilight period’, and the management of the property during this period is slightly complicated by the fact that the landlord cannot, logically, enforce any lease terms against the tenant. However, the converse is not true: in a defended forfeiture it is usually the tenant’s position that there was no right to forfeit, and that therefore the lease has never been forfeited, and so there is no inconsistency in it enforcing the lease terms against the landlord.

Forfeiture and residential leases

The law gives residential tenants greater protection against their landlords than that afforded to commercial tenants, for obvious reasons.

Sections 166-172, Commonhold and Leasehold Reform Act 2002 create a number of protections against forfeiture for tenants holding long residential leases. The net effect, from the landlord’s point of view, is to reduce the effectiveness of forfeiture in relation to such leases. In summary:

  • Regardless of any contrary provision in the lease, there are notice requirements which must be met before any payment of rent is due;

  • There can be no forfeiture for non-payment of a sum less than £350, or which has remained unpaid for less than three years;

  • No s.146 notice may be served unless either the tenant has admitted the breach alleged, or it has been determined by a relevant tribunal that there has been such a breach.

Under s.81, Housing Act 1996, there can be no forfeiture of any residential lease (not just long ones) for non-payment of service charge, unless either the tenant has admitted liability for the sum claimed, or it has been finally determined by a relevant tribunal that it is due.

As regards assured tenancies under the Housing Act 1988, it is provided by s.5(1) that a landlord cannot terminate the tenancy other than by obtaining an order for possession under the Act, thus effectively banning forfeiture. Instead the court may make an order for possession if one of the statutory grounds for possession is made out.

As mentioned above, forfeiture cannot be effected by peaceable re-entry in relation to a residential property (s.2, Protection from Eviction Act 1977).

For all these reasons, as regards residential tenancies forfeiture is largely confined to long leases (over 21 years), and comparatively little-used. Therefore, the focus of this book is on forfeiture of commercial leases.

Relief from forfeiture

Even where the landlord establishes that it had an undoubted right to forfeit, and has followed all procedures correctly, it may still not recover possession at the end of the day, because of the availability of relief from forfeiture. The courts have always had an inherent equitable jurisdiction to relieve against forfeiture, and this has been modified and supplemented by statute over a period of nearly 300 years. The resulting patchwork of different jurisdictions and procedures is highly technical and not obviously logical, nor is it easy to predict in operation.

Broadly, a tenant whose lease has been forfeited for non-payment of rent benefits from a statutory right to reinstatement of the lease so long as it pays all the arrears, plus interest, plus the landlord’s costs, within six months of the forfeiture (that is a simplification of the applicable time limits, but is usually reliable).

Holders of derivative interests granted out of the lease (i.e. sub-tenants, or holders of a mortgage or charge over the lease) may also apply for relief, and will likewise be required to pay all arrears, interest and costs. Relief, if granted to a derivative interest-holder, may take the form of the grant of a new lease, the court having considerable discretion as to its terms.

Where a lease has been forfeited for some other breach of covenant, the rules as to when an application for relief must be made differ according to the method of forfeiture adopted by the landlord. In the case of forfeiture by court proceedings, any application for relief must be made before the landlord has enforced an order for possession. In the case of peaceable re-entry, an application may be made after the forfeiture, but undue delay in doing so may bar relief.

Again, derivative interest-holders may apply, and if successful will obtain an order for the grant of a new lease. The general principle is that in order to obtain relief against forfeiture for a breach of covenant other than non-payment of rent, the applicant must remedy the breach of covenant, and pay all the landlord’s costs.

That brings into play again the distinction between remediable and irremediable breaches, since logic would suggest that if a lease has been forfeited for a breach which was irremediable, it follows that relief cannot be granted. However, this is another confused and unsatisfactory aspect of the law.

The older caselaw identifies irremediable breaches largely by reference to whether a covenant is positive or negative in substance: if a covenant requires some positive performance by the tenant, such as repairing the property, then the tenant who is in default can always remedy the breach by performing the obligation. However, that is very far from being a complete statement of the law, and it is apparent that in practice an irremediable breach does not prevent the grant of relief. The modern law takes as its starting-point the practical and sensible position that most breaches are in principle capable of remedy, and that the approach is to assess what harm has been caused by the breach and whether as a practical matter that can be put right.

Despite all this complication and confusion, the picture which emerges clearly from the decided cases is that, as is conventionally said, the courts “lean against forfeiture”. There is a reluctance to give the landlord the ‘windfall’ of early recovery of possession when the applicant for relief has taken steps to ensure that the landlord has suffered no real damage as a result of the underlying breach of covenant.

Availability of relief – practical relevance

It has already been mentioned that a tenant may respond to peaceable re-entry by seeking an interim injunction requiring the landlord to re-admit them to possession of the property. This will usually be obtained, but must rest upon the tenant having applied for relief from forfeiture (or perhaps, in cases of extreme urgency, undertaking to do so as soon as possible); the injunction will restore them to possession pending the outcome of the application for relief.

However, the tenant need not wait until forfeiture has taken place to apply for relief; an application may be made following service of a s.146 notice. It is often a useful step for a tenant to apply before forfeiture; the landlord will then be aware that peaceable re-entry would be futile, and it should be possible to persuade it to restrict itself to forfeiture by means of possession proceedings.

Another practical implication of the availability of relief is that the landlord who has forfeited because the tenant was in arrears of rent faces a period of six months or so when it cannot be certain that there will be no successful application for relief from forfeiture. That complicates re-letting, though there are measures the landlord can take to reduce the risk.

The availability of relief is also a factor to be considered in the decision whether to forfeit the lease in the first place. Landlords typically wish to forfeit for one of two reasons: (a) they want to recover possession from the tenant; or (b) they judge that the tenant will resist forfeiture, and will therefore remedy all breaches of covenant in order to obtain relief. Forfeiture undertaken with that motive is simply a means of applying pressure on the tenant to comply with its covenants.

A landlord who forfeits in order to recover possession must be made aware that the availability of relief means that it is far from guaranteed that possession will be obtained. However, a landlord who forfeits in order to secure the tenant’s compliance with the lease covenants must equally be made aware that once forfeiture has been effected it is generally irrevocable.

If the landlord has effected forfeiture by peaceable re-entry, the tenant may simply accept the situation, make no application for relief, and leave the landlord with vacant premises (and the breaches of covenant still not remedied). If the landlord has opted to forfeit instead by serving possession proceedings, the tenant is not obliged to defend them, or make any application for relief. The landlord may, of course, withdraw the proceedings, but that will not revive the lease if the right to forfeit was undisputed.

Forfeiture should therefore be undertaken in the understanding that the tenant will probably obtain relief if it remedies the breaches of covenant, but also in the acceptance that it may not apply for relief, and that the outcome may be a vacant property.

The difficulties raised even in this brief summary demonstrate why it is so desirable that the Law Commission’s long-standing proposals to rationalise the law (considered in Chapter 12) be acted upon.

Summary

In essence, the main features of the law of forfeiture of leases are:

  • The right for a landlord to forfeit a lease arises by express provision in the lease, where the tenant is in default of its lease obligations.

  • The right to forfeit can be very valuable, but may easily be lost by operation of the doctrine of ‘waiver’.

  • Before forfeiting, except for arrears of rent, the landlord must serve a warning ‘s.146 notice’ on the tenant, and allow them a reasonable time to remedy their breach of covenant.

  • Forfeiture may be effected simply by changing the locks, or by serving court proceedings claiming possession.

  • Forfeiture is highly restricted and little-used in relation to residential leases.

  • Tenants, sub-tenants, and those holding a mortgage or charge over the lease may apply for relief from forfeiture, which may be broadly understood as reinstatement of the lease, and this is readily granted so long as the breaches of covenant are remedied.

  • A landlord who wishes to recover possession may be frustrated in this by a grant of relief.

  • A landlord who forfeits in order to pressure the tenant into complying with its lease obligations may be left with a vacant property, since forfeiture once done is irrevocable.

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