This month, Jonathan Seitler QC guides practitioners through the basics of the law relating to forfeiture of leases
FORFEITURE CHECKLIST
- What is forfeiture?
- What are the risks of forfeiture?
- What are the prerequisites for forfeiture?
- When is a section 146 notice necessary?
- Can a long lease of a residence be forfeited?
- What amounts to a waiver of a right to forfeit?
- What is the difference between “continuing” and “once and for all” breaches?
- How does relief from forfeiture work?
- Is relief from forfeiture usually granted?
- What is the position of sub-tenants and mortgagees?
What is forfeiture?
A landlord’s right to forfeit is a right, which has to be expressed in the lease, to bring the term of the lease to an end prematurely if certain events occur. Commonly, these involve either the default of the tenant in complying with its covenants under the lease or an act of insolvency on the part of the tenant.
Forfeiture can either be by way of legal proceedings or, in the case of entirely non-residential property, by a physical re-entry, as long as it can be effected without violence to person or property (Protection from Eviction Act 1977 and section 6 of the Criminal Law Act 1977): see Pirabakaran v Patel and another [2006] 3 EGLR 23. Mixed-use premises are, for these purposes, treated as if residential.
What are the risks of forfeiture?
The key to any consideration by the landlord of forfeiting a lease is the necessary recognition that once the lease is forfeited – whether by peaceable re-entry or by the issue and service of proceedings – the tenant can choose to accept it and walk away from the lease. Furthermore, once the landlord forfeits the lease, a useful variety of other remedies – the remedies referred to below which waive the right to forfeit – will be lost to it (though not the right to claim damages for terminal dilapidations).
What are the prerequisites for forfeiture?
Four matters need to be checked before a forfeiture is contemplated:
(i) There must be an (express) forfeiture clause in the lease. A right to forfeit is not implied.
(ii) Whether the relevant event is indeed a forfeitable event, ie that it amounts to a breach of a particular covenant or is the right form of insolvency classified as such by the forfeiture clause.
(iii) If the covenant is one to keep or put in repair during the currency of the lease, and the lease is for more than seven years and three years or more remain unexpired, application first has to be made for permission to forfeit, under the Leasehold Property Repairs Act 1938.
(iv) When a section 146 notice is necessary.
When is a section 146 notice necessary?
A section 146 notice (named after the section which requires it in the Law of Property Act 1925) is a formal notice which sets out certain statutorily required information. It is essential to check the necessity for, proper destination of and contents of a section 146 notice, and wait a reasonable time before commencing proceedings: see Anders v Haralambous and another [2013] EWHC 2676 (QB) as an example of a case illustrating the importance of accuracy in such a notice.
The section 146 notice is necessary where the landlord seeks to forfeit for breach of covenant or condition other than for non-payment of rent. The notice must (a) specify the breach, (b) if it is capable of remedy, require it to be remedied, (c) require this within a reasonable time, (d) request any monetary compensation, and (e) if necessary, refer to the tenant’s rights to claim the benefit of the Leasehold Property Repairs Act 1938. As regards (c), it is not necessary to set out an actual time period in the notice. Stating that the breach must be remedied “within a reasonable time” usually suffices (as opposed to having to state a specific time period): see Billson and others v Residential Apartments Ltd [1992] 1 EGLR 43.
Whether a breach is remediable or irremediable depends on its nature and, in particular, it is remediable if the mischief caused by the breach can be removed: see Savva v Houssein [1996] 2 EGLR 65 and Wickland (Holdings) Ltd v Telchadder [2014] UKSC 57; [2014] PLSCS 304.
Can a long lease of a residence be forfeited?
Yes, but subject to sections 167 and 168 of the Commonhold and Leasehold Reform Act 2002.
Section 167 prevents forfeiture in relation to a long lease of a dwelling on the grounds of arrears of rent, service charge or administration charge unless they exceed a certain level (currently £350) or have been present for a certain period (currently three years): see the Rights of Re-entry and Forfeiture (Prescribed Sum and Period) (England) Regulations 2004, 2005.
Section 168 also restricts the right to serve a section 146 notice in respect of a tenant’s breach of covenant in relation to a long lease of a dwelling: such a notice may only be served if the tenant has admitted the breach or it has been finally determined on an application that the breach has occurred. The application is usually made to the First-tier Tribunal.
What is waiver of a right to forfeit?
The landlord waives his right to forfeit when doing something or saying something to the tenant, with knowledge of the cause of the entitlement to forfeit, which is unambiguous and which, viewed objectively, is only consistent with an intention to treat the tenancy as continuing.
The important part of that definition is the requirement that whether the waiver has occurred is to be “viewed objectively”. It does not matter how egregious is the breach of covenant nor whether the landlord intended to waive it. Waiver happens irrespective of the landlord’s subjective intention. It is objectively judged entirely on what it says or does. A “rent stop” must therefore be effected the moment the landlord’s right to forfeit arises (usually once it knows of the breach of covenant or, in the case of non-payment of rent, a set number of days after the rent falls due for payment).
Rent cannot be demanded or accepted “without prejudice”: see Central Estates (Belgravia) Ltd v Woolgar [1971] 220 EG 803.
Potential acts of waiver include demanding or accepting rent, relying on rights under commercial rent arrears recovery (“CRAR”), granting licences to assign or sub-let, serving notices under other Acts and seeking an injunction.
What is the significance of the distinction between “continuing” and “once and for all” breaches of covenant?
All types of breaches of covenant can be waived in theory, but a waiver of a breach which is “continuing”, as opposed to “once and for all”, will not be so significant: being a continuing breach means that the breach occurs afresh, as it were, immediately after it has been waived.
Continuing breaches include disrepair, a failure to insure and breach of a prohibition in relation to user (unless the unlawful change of use is part and parcel of an assignment).
“Once and for all” breaches include not paying rent, insurance monies or service charge; unlawfully assigning or sub-letting; failing to reinstate; making alterations without consent (though the breach will be continuing while the alterations are being actually carried out); and becoming insolvent.
It is important to note, though, that a landlord can accept rent which fell due before the point at which it knew about the right to forfeit: see Capital & City Holdings Ltd v Dean Warburg Ltd and others [1989] 1 EGLR 90. This is because such rent can be accepted as a debt, due in the past, irrespective of the termination of the lease. Such acceptance does not, therefore, indicate anything (objectively) about the landlord treating the lease as remaining on foot, now.
How does relief from forfeiture work?
The law “abhors a forfeiture”: see Goodright d Walter v Davids (1778) 2 Cowp 803. The court will always lean against allowing it to occur and the landlord to obtain a windfall. The tenant therefore has a right to seek “relief” against any forfeiture if and when the forfeiture is established.
Such relief is available in the case of forfeiture for breaches other than to pay rent under section 146(2) of the Law of Property Act 1925. The position is governed by different statutory provisions in the case of forfeiture for non-payment of rent – sections 138 and 139 of the County Courts Act 1984 and (for High Court cases) section 38(1) of the Senior Courts Act 1981.
Is relief from forfeiture usually granted?
In essence, relief is granted, usually on terms that the breach is remedied in full so as to put the landlord back into the position it would have been had there been no breach, unless the breach is so severe and sustained that the court is persuaded that the tenant is either viscerally unwilling, or fundamentally unable, to comply with its covenants under the lease.
In Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224 relief was granted despite three applications for relief being necessary (as a user in breach of covenant had persisted) because “the purpose of the reservation of a right of re-entry is to provide the landlord with some security for the performance of the tenant’s covenant… the risk of forfeiture is not intended to operate as an additional penalty for breach” (Patten LJ at para 50).
Similar results occurred in Freifeld and another v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] EGLR 60 and Safin (Fursecroft) Ltd v Estate of Dr Said Ahmed Said Badrig (deceased) [2015] EWCA Civ 739; [2015] PLSCS 217. The former case involved a tenant, who was already the subject of complaints about nuisance and annoyance, deliberately granting a sub-lease. The latter involved non-compliance with the terms of relief which the court had already imposed. In both cases relief from forfeiture was obtained. The law will only deny relief from forfeiture if there is no realistic alternative, especially where the windfall to the landlord of forfeiture far outweighs its loss as a result of the breach.
What is the position of sub-tenants and mortgagees?
Relief is also available to sub-tenants and mortgagees and, indeed, to any other person with an interest in the property, under section 146(4) of the Law of Property Act 1925. Relief will be on terms granted by the court but for no longer a term than the original sub-lease. Usually, so as not to prejudice the landlord, it will be on terms which reflect the terms of the headlease rather than the sub-lease.
LEADING PROVISIONS AND AUTHORITIES
- Law of Property Act 1925, section 146
- Commonhold and Leasehold Reform Act 2002, sections 167 and 168
- County Courts Act 1984, sections 138 and 139
- Central Estates (Belgravia) Ltd v Woolgar [1971] 220 EG 803
- Anders v Haralambous and another [2013] EWHC 2676 (QB)
- Wickland (Holdings) Ltd v Telchadder [2014] UKSC 57; [2014] PLSCS 304
- Freifeld and another v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] EGLR 60
- Safin (Fursecroft) Ltd v Estate of Dr Said Ahmed Said Badrig (deceased) [2015] EWCA Civ 739; [2015] PLSCS 217
- Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224
SEITLER’S LEADING PRACTITIONERS
- Helen Balliger, Olswang
- Lucy Housego, Linklaters
- Sarah Kirwan, Stevens & Bolton LLP
- William Lawrence, WH Lawrence
- Jeremy Laws, Gaby Hardwicke
- Donna Radcliffe, Walker Morris
- Darren Thorneycroft, Hallett & Co
- Gemma Tolmie, BrookStreet des Roches
Jonathan Seitler QC is a barrister at Wilberforce Chambers
