A tenant’s guide to navigating forfeiture by re-entry

In periods of economic turbulence, the following scenario will be familiar to many: a tenant of business premises falls behind in paying rent (or other sums reserved as rent) under a lease and seemingly out of the blue (and usually in the middle of the night) its landlord forfeits the lease by changing the locks. The result? Major disruption to the tenant’s business. It is particularly pronounced where the tenant’s business is to sublet or licence its space to third-party businesses. Depending on the nature of its business, the tenant could face financial ruin if the situation is not resolved quickly and access to the property restored. This article sets out a step-by-step guide that a tenant in such a situation should follow to best protect its business interests and get back into its property for trade PDQ. Step 1: Call a solicitor This should preferably be a property litigation expert familiar with similar scenarios who will be able to give the tenant the necessary advice quickly and efficiently. The solicitor will need to review the lease and any ancillary documents and advise on whether the landlord’s forfeiture of the lease is lawful and whether there are any procedural irregularities, which the tenant may be able to raise to challenge the forfeiture. If the lease has been validly forfeited, then an application for relief from forfeiture must be made. Relief cannot be agreed between the parties and can only be ordered by the court. A relief application can be made on either a consensual or a contested basis. Step 2: Contact the landlord Contested court applications are time-consuming and expensive. Before substantial costs are incurred, it is sensible to contact the landlord at an early juncture to explore whether the landlord is prepared to (1) allow the tenant to re-occupy the property and (2) consent to a relief from forfeiture application on reasonable terms (ie payment of the outstanding sums, interest on them and the landlord’s costs). If there is no immediate common ground, the potential for settlement should be kept under review as the matter progresses. Step 3: Consider what remedy is wanted and make the appropriate application If all the tenant needs is access to collect their belongings, an application requiring the landlord to provide access should be made. Consideration of the Torts (Interference with Goods) Act 1977 and the duties on the landlord arising under this should also be given. However, the vast majority of tenants will want access to their premises as quickly as possible to resume trading as their business is in peril. Where the landlord is refusing to engage or permit the tenant access to the property then: a claim for relief from forfeiture should be made; and an urgent application for an interim injunction to permit the tenant to re‑enter the premises should be sought. Such an injunction will usually be sought for the period up to the determination of the tenant’s application for relief by the court. The biggest practical challenge is often getting the injunction application listed in short order, particularly if issuing the claim in the County Court. Making a counter-appointment to get the application issued is usually the most effective way in which to achieve this. Step 4: Obtain an injunction In order to obtain an injunction the tenant will have to persuade the court that there is a serious question to be tried. If the court is persuaded that there is, it must then consider: whether damages are an adequate remedy – if so, an injunction is unlikely to be granted; if damages are not an adequate remedy, whether the tenant’s cross-undertaking in damages adequately protects the landlord (more on this below); and the “balance of convenience” – is the loss and inconvenience, which the tenant will be exposed to if the injunction is refused, greater than the loss and inconvenience that the landlord will be exposed to if the injunction is granted? If the tenant can satisfy the above test, it should bear the following key considerations in mind: Notice The tenant will need to decide whether to notify the landlord of the injunction application and, if so, how much notice should be given. This is fact-specific. Sometimes, circumstances such as time pressure or lack of contact details do not allow for the provision of notice to the landlord, but any notice, even if short, may play to the tenant’s advantage at the initial hearing. Full and frank disclosure When a party makes an application without notice (or on very short notice) they are under a duty to give full and frank disclosure to the court. This means that they must disclose all material matters to the court even if they support the other party’s case. The tenant should therefore ensure that all relevant information is given to their solicitor in advance of the hearing. If an interim injunction is granted, the court will list a return hearing, at which it will decide whether the injunction should be made final. Failure to comply with the duty of full and frank disclosure means the injunction may be revoked at the return hearing and the tenant could be penalised on costs. Cross-undertaking in damages The court will commonly make the granting of an injunction order conditional on receiving a cross-undertaking in damages from the tenant. This is a binding agreement to compensate the landlord for any loss it incurs as a result of the grant of the injunction, if the court subsequently finds that the injunction was wrongfully made. The tenant needs to make their solicitor aware of any ancillary facts, such as the existence of a guarantee or other security, which can be used to try and convince the court that a cross-undertaking is unnecessary in the circumstances, although obtaining an interim injunction without providing a cross-undertaking is quite unusual. If the tenant is a man of straw, the landlord may require the undertaking to be given by the parent company. Step 5: Obtain relief The County Court derives jurisdiction to grant relief from forfeiture from statute, but can only do so within six months of the landlord retaking possession of the premises. The High Court, on the other hand, has an inherent equitable jurisdiction to grant relief on such terms as it sees fit. The six-month time limit is still used as a guide, but the High Court can choose to exercise its jurisdiction beyond the time-limit depending on the facts. In both the County and the High Court, the granting of relief is discretionary, so the court stands to be convinced that relief should be granted. The court invariably makes relief conditional on payment of the arrears and costs. If the tenant is unable to pay the arrears in one go, they may be able to negotiate a payment plan with the landlord. However, landlords who have another tenant lined up are likely to be unwilling to agree to this. The court also has limited discretion to allow time for payment, but this must be in the immediately foreseeable future, so as to provide a sufficient degree of certainty that payment will be made. Keep a calm head Tenants whose leases are forfeited for non-payment of rent or other sums due under a lease often panic, particularly if their business is dependent on staff and customers being able to access the premises. Obtaining the right advice fast is crucial and may make it possible for the tenant to go from being locked-out to regaining access in 24 hours or less. But there are a number of legal tests that must be satisfied to achieve this and the restoration of the lease. Mark Reading is a partner and Isabel Emerson-Lich is a managing associate in the property litigation team at Mishcon de Reya LLP Image © Shutterstock