Determination clauses, forfeiture and relief

Key points Revocation of a proprietary interest on default is a forfeiture clause The court has discretion to grant relief from forfeiture where the grantee holds a proprietary interest and the termination provision is to secure performance The court has considered the scope of its jurisdiction to grant relief from forfeiture in Hush Brasseries Ltd v Rlukref Nominees (UK) One Ltd and another [2022] EWHC 3018 (Ch); [2022] PLSCS 197, concerning the termination of an option. Background The claimant ran a restaurant and hospitality business from premises in Mayfair, London W1, which it held under a lease for a term of 25 years expiring in July 2024. In March 2011, the claimant was granted a “call” option, exercisable by notice in the last year of the term, by which it had the right to call for a new lease of the premises for a term to December 2030. The landlord had a similar “put” option. The option provided that the landlord could determine the agreement (the determination clause) if the tenant was in breach of any of its provisions or on the occurrence of any of the events set out in clause 5.1 of the lease which entitled the landlord to forfeit. One of those events was that rent remained unpaid 21 days after the due date for payment. The defendants acquired the freehold of the premises in October 2017. During 2020 and 2021, because of the restrictions imposed by the Covid-19 pandemic, the claimant fell into arrears of rent under the lease. In July 2021, the defendants served notice to terminate the option on the ground of rent arrears of £426,444, but they did not seek to forfeit the lease at the same time. It was agreed that the notice was effective to terminate the option. Subsequently, following negotiations between the parties, a settlement was reached: a proportion of the arrears would be waived and the remainder would be paid on various dates. The claimant discharged the arrears and sought relief from forfeiture of the option. The law In order to exercise its discretion as to whether to grant relief from forfeiture, the court needed to be satisfied that the claimant had obtained by the option a sufficient proprietary interest in the property and that the determination clause secured the performance of the tenant covenants in the lease, in particular the obligation to pay rent. Did the claimant have a sufficient proprietary interest in the premises? The extent of the proprietary interest required was disputed. The defendant argued that the claimant had no proprietary interest in the land immediately before termination of the option because the claimant was a long way from being able to call for any lease of the premises. The claimant contended that, by vesting in the grantee a right to call for the transfer of the land, an option to purchase land creates an immediate equitable interest in it (London and South Western Railway Co v Gomm [1882] 20 ChD 562). The judge concluded that immediately before the option was terminated the claimant had a relevant land interest which was supported by the fact that the claimant could and did cause the option to be noted against the registered freehold title to the property under section 32 of the Land Registration Act 2002. The claimant needed only to establish that immediately before service of the termination notice it had a proprietary interest in the premises by virtue of the option. It was not necessary for that proprietary interest to have a particular quality: Vauxhall Motors Ltd v Manchester Ship Canal Co Ltd [2019] EGLR 51. Did the determination clause secure the performance of the tenant covenants in the lease? Where a proprietary interest is granted subject to revocation or determination on breach, the clause providing for determination is a forfeiture (Cavendish Square Holding BV v Makdessi [2016] EGLR 15). When the option was granted, the parties to it were landlord and tenant under the lease: their intention – to be inferred from the context in which the option was granted and its terms – was that both lease and option would go hand-in-hand in practice. So, if the lease was forfeited, the option was likely to be brought to an end. Both clause 5 of the lease – the forfeiture clause – and the determination clause in the option were intended to secure, and were security for, the tenant’s performance of its covenants under the lease. The notice of termination reinforced this conclusion by asserting the existence of the conditions for forfeiting the lease, which was the reason for giving notice to terminate the option. Should the court exercise its discretion to grant relief from forfeiture? The judge, reviewing the authorities, concluded that the court exercises its discretion to grant relief from forfeiture when, on all the evidence before it, it would be unconscionable for the non-defaulting party to rely on its contractual termination right. Had the defendants forfeited the lease rather than the option, it was very likely that the claimant would have been granted relief from forfeiture since, in the eyes of equity, the proviso for re-entry is a security for the rent. It would be particularly unfair not to grant the claimant relief since the defendants still had a source of rent which would continue for the remainder of the lease. The claimant’s default was not wilful and the arrears had been swiftly paid. Save in exceptional circumstances, the function of the court is to grant relief when all rent and costs have been paid (Woodfall: Landlord and Tenant 17.181). It would be unconscionable for the defendants to retain the benefit of their termination of the option. Louise Clark is a property law consultant and mediator Image © Hush Brasseries