Allyson Colby explains how a Court of Appeal ruling on forfeiture balanced the rights of both landlord and tenant
Key points
- Forfeiture is designed to secure compliance with covenants, and not to penalise tenants
- The court’s power to grant relief from forfeiture enables it to adopt creative solutions, thereby protecting the landlord while preserving the value of a lease for the tenant
Most leases include a provision giving the landlord the right to forfeit if the tenant defaults. Forfeiture is a drastic remedy; it terminates the tenant’s lease, leaving the landlord to enjoy the proceeds of any subsequent sale or re-letting without having to compensate the tenant for any value lost.
However, tenants can ask the court for relief from forfeiture under section 146(2) of the Law of Property Act 1925. The breadth of the discretion conferred by the section is very wide. It directs the court to have regard to the proceedings and conduct of the parties and to all the other circumstances of the case, and enables the court to grant relief on such terms, if any, as it thinks fit.
Freifeld and another v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] PLSCS 241 exemplifies the current approach to applications for relief and demonstrates the court’s reluctance to allow a landlord to forfeit a valuable lease, despite the tenant’s unsatisfactory conduct.
Windfall gain
The case concerned the forfeiture of a head lease granted in 1982 for a term of 99 years. The premises demised by the lease comprised retail units, which were situated below a residential block of flats and were sublet to business occupiers at rack rents. No monetary rent was payable under the lease because it was granted at a premium. Consequently, the lease had significant value.
Most of the lessees of the flats held shares in the management company that owned the freehold of the building. The company had long been complaining about problems caused by a Chinese restaurant operating from one of the units and claimed to have spent much time and money as a result. Nonetheless, the tenant granted the restaurateurs a further sublease to take effect on the expiration of their existing sublease, without obtaining the company’s consent, in breach of the alienation covenants in his lease.
The company discovered the existence of the new sublease after inspecting the registers of title at the Land Registry. It claimed that, had its consent been sought, it would have sought undertakings as to how the restaurant operated going forwards, and forfeited the head lease. Was the trial judge right to refuse relief from forfeiture, even though the company would receive an uncovenanted windfall in the form of a multi-million-pound asset as a result?
Deliberate breach
The judge at first instance ruled that the tenant had shown such a cynical disregard for his obligations and had done so little to rectify his breach of covenant before trial that it would be wrong to compel the company to remain in a contractual relationship with him. In the judge’s view, the intrinsic value of the unexpired forfeited term was not, of itself, persuasive. If it were, this would neuter or very seriously undermine a landlord’s ability to enforce covenants in a long lease.
The Court of Appeal took a different approach. It accepted that it would be wrong to encourage the belief that tenants can ignore their obligations and buy their way out of trouble. However, the fact that a breach was wilful does not mean that relief is available only in exceptional circumstances.
Relevant considerations
Arden LJ noted that landlords reserve rights of re-entry to secure the performance of leasehold covenants. The remedy is not intended to operate as an additional penalty. It is designed to protect the reversion from breaches of covenant that remain unremedied and the court must ask itself whether forfeiture would be disproportionate. The fact that the breach was wilful will be a relevant factor. However, so too is the value of the leasehold interest and the advantage that the landlord would obtain from its forfeiture.
The judge had wrongly valued the windfall that would accrue to the company in this case. He considered that the lease had very little value because it had already been forfeited. However, the lease would not be a valueless asset, were the court to grant relief.
Creative solution
The tenant had deliberately disregarded his leasehold obligations and then concealed his breach of covenant, and the judge had rightly refused relief on the basis that the parties’ dysfunctional relationship would continue. But was there some way of reconciling the landlord’s right to forfeit the lease with the tenant’s right not to be required to transfer a valuable asset to his landlord?
The tenant had belatedly realised the seriousness of his actions and had procured the surrender of the new lease after the judgment at first instance. However, it would not be fair to reinstate the head lease without ensuring that the future would be different. The solution was to grant the tenant relief from forfeiture for the purposes of, and conditionally upon, the sale of the head lease within a specified period.
The tenant was to be allowed to market the property through professional agents with a view to a sale to an assignee approved by the landlord in accordance with the provisions of the head lease. The sale would put an end to the prejudice caused by the tenant’s conduct and, if he did not agree a sale within the specified period, the forfeiture would take effect and he would have only himself to blame.
It is worth adding that Briggs LJ finished on a cautionary note, warning that substantial value may have to be passed to a landlord if there is no other way to secure compliance with a lease.
Allyson Colby is a property law consultant
