In the final part of their series, Peter Petts and Jamal Demachkie look at the competing interests that can arise between tenants seeking relief from forfeiture, and third parties which have entered into new leases of the same property.
Let us take a common scenario in a landlord and tenant relationship: a tenant of commercial property breaches a covenant in the lease, and the landlord (after serving a section 146 notice under the Law of Property Act 1925 for any non-rent breaches) peaceably re-enters and forfeits the lease.
However, before the tenant applies for relief from forfeiture, the landlord decides to relet the property to a third party. This third party may be entirely in the dark as to the tenant’s right to apply for relief. What happens when the (original) tenant remedies the breach and applies to the court for relief from forfeiture? Granting relief will prejudice the third party; refusal of relief will prejudice the tenant.
There are two situations in the law of forfeiture of leases where the intervening rights of third parties may be relevant to the question of relief:
- The grant of third-party rights may impact on the court’s discretion to grant relief in the first place; and
- Assuming relief is granted to the tenant, and the (original) lease is reinstated, the matter becomes relevant when determining which interest takes priority.
Third-party rights and whether to grant relief
Dealing first with the question of how third-party rights may impact on whether the court grants relief, the matter is governed by authority.
In Silverman and others v AFCO (UK) Ltd and others [1998] 1 EGLR 51, the Court of Appeal held that, where a landlord acts reasonably and not precipitously in granting a lease to a third party, relief may be refused. Slade LJ said: “…the court may, in the exercise of its discretion, properly refuse relief from forfeiture even to a tenant who belatedly tenders the full amount of outstanding rent and costs if, during the interim period, the landlord has, not unreasonably or precipitously, granted rights in the premises to third parties, on the footing that the original lease is at an end, and the court considers that, in all the circumstances, the grant of relief to the original tenants would cause injustice to the landlord or the third parties or both.”
The converse is also true. Relief will not be refused merely because the landlord has relet the property unreasonably, or hastily, following the forfeiture; especially where the re-letting takes place after the tenant has applied to the court for relief. In Lovelock v Margo [1963] 2 QB 786, Lord Denning MR put the matter pithily (and not at all sympathetically) as follows: “We were told that, notwithstanding the existence of this action and almost in defiance of it, a few days before the action came on for hearing, the landlord let these premises to someone else, having got into the premises, as I have said. So much the worse for her. She takes the risk if she lets them to others in face of a pending law case. If that is what the landlord did, the burden must rest on her.”
These principles have been restated more recently in Keshwala and another v Bhalsod and another [2021] EWCA Civ 492; [2021] EGLR 24, where the Court of Appeal grappled with the question of whether delay on the part of the tenant in applying for relief from forfeiture could, on its own, justify the refusal of relief.
In observing that delay on its own can conceptually lead to the refusal of relief the court nevertheless observed that such instances would be rare, Nugee LJ noting that: “If therefore all that had happened was that the landlord had taken possession and then done nothing with the premises, simply sitting back to see what happened, then the mere fact that the tenant had delayed was unlikely to be regarded as sufficient by itself to cause the court to refuse relief.”
Indeed, it appears that there has been no reported case of relief being refused solely on the ground of delay. Nevertheless, as Keshwala also made clear, delay coupled with a landlord altering its position (including by the grant of third-party rights) may justify the refusal of relief – provided that the landlord has acted reasonably and not precipitously in its actions. In Keshwala, relief was refused because of the grant of a lease to a third party five months after the forfeiture, and prior to the tenant applying for relief.
Accordingly, when considering how the subsequent grant of a lease to a third party will impact on whether relief is granted, the question revolves around the extent to which a landlord has acted “reasonably and not precipitously”.
Third-party rights and priority
Assuming that the court considers that a landlord has acted unreasonably or precipitously, such that the grant of third-party rights will not prevent the court granting relief from forfeiture, where does this leave the third party (who may well be entirely innocent and unaware of the landlord’s precipitous actions)?
If the court grants relief, the tenant’s (original) lease is reinstated retrospectively (Dendy v Evans [1910] 1 KB 263), yet the (new) lease granted to the third party remains valid. The question in such a scenario is which lease takes priority? If the new lease of the third party takes priority, the effect of relief would be to reinstate the original lease as a concurrent lease (ie a lease of the reversion) subject to the new lease. In such circumstances, the original tenant becomes the third party’s landlord and will be entitled to the rent under the new lease. If the landlord received a premium on the grant of the new lease, that premium should be paid to the original tenant (Bank of Ireland Home Mortgages v South Lodge Developments [1996] 1 EGLR 91).
Conversely, if the original lease takes priority, the effect of relief will be to put the tenant back into possession, with the new lease taking effect as a lease of the reversion, such that the third party becomes the tenant’s immediate landlord, and entitled to receipt of the rent.
Clearly, the question of priority will have wide ramifications for all parties. How, then, does the court cut this Gordian knot? Ultimately, the answer is simple (although its application is frequently anything but): the issue of priority is governed by the doctrine of notice in accordance with conventional conveyancing principles, depending on whether the land is registered or unregistered.
Unregistered land
The right to claim relief from forfeiture is a mere equity. Accordingly, with unregistered land, a third party in the form of “equity’s darling” (a bona fide purchaser for value without notice of the original tenant’s equity to claim relief) would take priority over the original lease; if the third party had notice, or was not a purchaser for value, the original lease would take priority.
The differing outcomes can be seen in Fuller v Judy Properties [1992] 1 EGLR 75 (where the third party did not have notice of the tenant’s right to claim relief, and accordingly took priority) and Bland v Ingrams Estates Ltd [1999] 2 EGLR 49 (where the third party was found to have constructive notice, such that the original lease took priority).
Registered land
In registered land, the matter is governed by section 29 of the Land Registration Act 2002. By virtue of section 116 of the 2002 Act, a mere equity to claim relief from forfeiture is a proprietary interest capable of protection by notice on the register. Accordingly, to take priority over a disposition of the registered estate made for valuable consideration (which would include the grant of a lease to a third party), the equity must be protected by notice.
A third party would therefore take the new lease free from the tenant’s right to claim relief from forfeiture if this equity was not protected at the date of registration, irrespective of whether that third party had notice of the right to seek relief (Bank of Ireland).
Accordingly, a tenant whose lease has been forfeited and is intending to apply for relief would be well advised to enter a notice on the registered freehold title in order to protect its position from a subsequent disposition by the landlord, prior to resolution of its application for relief from forfeiture.
Jamal Demachkie and Peter Petts are barristers at Gatehouse Chambers. This article is based on chapters from Forfeiture of Leases (Petts P and Demachkie J, Law Society Publishing, 2021).
