In the first of a four-part series on forfeiture of leases, Peter Petts and Jamal Demachkie consider two knotty issues concerning forfeiture and rent.
As most practitioners will be aware, the law on forfeiture of leases is a hodgepodge of statute, case law, and legal principles, and these rules often seem to compete with one another for which makes least sense. This note will consider two of the more controversial (but lesser known) areas of this law:
1. The impact of Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504; [2007] 1 EGLR 31 on the question of payment of rent arrears when obtaining relief from forfeiture; and
2. The interrelation between rent and mesne profits and the possibility of a landlord recovering both sums (“double recovery”) for the same period following forfeiture of a lease.
Thomas and payment of arrears
Let us begin with the basics, and an example:
- A lease contains a covenant to pay rent, monthly in advance. It also contains a forfeiture clause (or right of re-entry) if the tenant fails to pay rent.
- The tenant fails to pay rent on 1 January and 1 February.
- On 15 February, the landlord demands the January and February unpaid rent.
- By 25 February, the landlord has had enough and forfeits the lease.
- The tenant seeks relief from forfeiture and the matter reaches court. The question is, how much of the rent does the tenant need to pay to obtain relief from forfeiture?
This may seem an odd question; after all, as the landlord will no doubt point out, forfeiture is security for the payment of rent; it is often said that it is an invariable condition of forfeiture for non-payment of rent, that the rent is repaid before relief is granted (see, for example, Barton Thompson v Stapling [1996] 1 Ch 499). The landlord may point to the statutes governing relief and argue that under section 138 of the County Courts Act 1984, the court grants relief if “all the rent in arrear” is paid, and in the High Court, under section 212 of the Common Law Procedure Act 1852, relief is obtained if the tenant pays “all the rent and arrears”.
However, this would be to ignore the impact of waiver of the right to forfeit and the dicta of Neuberger LJ (as he then was) in Thomas.
The difficulty for the landlord in our example is that, when demanding the January and February rent arrears on 15 February, the landlord has affirmed that the lease was in existence on 1 February (as otherwise the February rent would not have been payable). By demanding the February rent, the landlord has waived the right to forfeit for the earlier January arrears.
This issue arose in Thomas; a factually complex case which also dealt with the right of appropriation and the impact of CVAs on forfeiture, but included a factual background in which (as the court found) the right to forfeit for earlier breaches of covenant to pay sums had been waived.
In Thomas, Neuberger LJ (with whom the other judges agreed) observed that it would be wrong in principle to require a tenant, so as to obtain relief from forfeiture, to pay a sum in respect of which the right to forfeit had been waived. Neuberger LJ considered that the expression “all the rent in arrear” (in section 138(3) of the 1984 Act) and “all the rent and arrears” (in section 212 of the 1852 Act) must be a reference to “all the rent and arrears in respect of which the landlord could rely to effect a forfeiture”.
This was said to be consistent with Gill v Lewis [1956] 2 QB 1, another case on relief from forfeiture, from which it is clearly established that, save for exceptional circumstances, the court will not consider other breaches of covenant when deciding whether to grant relief from forfeiture for unpaid rent.
In our example above, the lease was forfeited for the unpaid rent in February, and that month’s arrears would need to be paid to obtain relief (as would any subsequent rent which would have fallen due by the time the court grants relief). However, the unpaid rent in January was not a ground for forfeiture (as the right had been waived) so was – in the language of Gill – merely an “other breach of covenant” and, in the absence of any exceptional circumstances, it would not be appropriate for the court to require such a breach to be remedied as a condition of the grant of relief from forfeiture.
Thomas is sometimes criticised, and it is true that the decision was strictly obiter on this point. Nevertheless, the decision makes logical sense (as explained above) and, given the clear judgment of the court and the status of the learned judge in question, it is considered that the decision should be followed.
The impact of this rule may be acutely felt (a tenant could be in arrears of rent for hundreds of thousands of pounds, but might find itself in a position where it can obtain automatic relief from forfeiture on payment of just the last instalment). Of course, this does not excuse the tenant from paying these earlier rent arrears, merely that the powerful remedy of forfeiture cannot be used by the landlord as a means to seek payment. There would be no objection to a court ordering the tenant to pay the earlier rent arrears, provided that this payment is not expressed as a condition of relief.
What is perhaps most surprising with Thomas is that this point is not raised by tenants with greater regularity, especially given the frequency with which landlords waive earlier rent arrears (often by demanding subsequent quarters’ rent).
Rent, mesne profits and “double recovery”
Not to be outdone, another (even lesser known) area of the law of forfeiture can – theoretically at least – provide solace to landlords. Again, we begin with the basics.
As all practitioners will know, rent is payable under an extant lease. Once the lease has been terminated by forfeiture, mesne profits are thereafter recoverable until possession is delivered up.
In the vast majority of leases, rent will be paid in advance (such that the apportionment of rent under the Apportionment Act 1870, which applies to rent payable in arrears, is rarely encountered in modern practice). Furthermore, as the Supreme Court has ruled (Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8), it would be very rare to imply a term which permits a tenant to recover a proportion of rent payable in advance under a lease.
However, as is made clear in Canas Property Co v KL Television Services [1970] 2 QB 433, once the lease is forfeited (on service of proceedings in the case of forfeiture by action) the tenant immediately becomes a trespasser; mesne profits are payable for the duration that the tenant remains a trespasser.
As such, if rent falls due under a lease on 24 June, the full sum becomes due on that date. If the lease is forfeited on 25 June, the tenant is not entitled to recover any proportion of that rent; the landlord can retain the full amount. However, if one applies the ratio of Canas then, on 25 June, the tenant becomes a trespasser and, from that date until possession is delivered up, becomes liable for damages in the form of mesne profits.
In fact, such payment would not amount to “double recovery”; the landlord would be entitled to rent and mesne profits for the same period, because the status of the tenant has changed. Such an argument is consistent with the (obiter) comments of Lord Neuberger in Marks & Spencer at [47]); nevertheless, such “dual recovery” (as it may be better termed) would represent a sea-change to the approach of most judges dealing with forfeiture claims.
Again, considering the numerous forfeiture actions that proceed through the courts, it is surprising that this point is not raised – by landlords this time – with greater regularity.
Jamal Demachkie and Peter Petts are barristers at Gatehouse Chambers. This article is based on the chapters Breach and Relief from Forfeiture: Rent Arrears, in Forfeiture of Leases (Petts P and Demachkie J, Law Society Publishing, 2021).
