In the first of a series of three articles about forfeiture, Emma Humphreys explains some of the basic rules for commercial and residential leases
When faced with a tenant struggling to pay the rent, landlords have a number of options. As confidence in the market (slowly) grows, landlords may be more willing to enforce their rights through forfeiture, a process that terminates the tenant’s interest and those of any other interested parties, such as a subtenant.
Lease provisions
The first, and most important, consideration is when a landlord is allowed to forfeit a lease. Generally, there needs to be an express proviso in the lease allowing for re-entry. In the absence of such a clause, a landlord will not be entitled to forfeit unless there has been a breach of condition. This will occur where the tenant fails to perform an obligation that goes to the root of the landlord and tenant relationship, such as the requirement to pay rent.
Even if there is a re-entry clause in the lease, it needs to cover the particular breach complained of. For example, a covenant against assignment is not broken by a subletting. Landlords also need to be careful in insolvency situations to ensure that the re-entry clause covers the tenant’s particular form of insolvency. (In addition, landlords will need to check whether there are any restrictions on forfeiture as a result of the tenant’s insolvency – see below.)
The next step is to see whether the lease sets any preconditions for exercising the right to forfeit. Typically, forfeiture provisions will allow a grace period for paying sums due before the landlord is entitled to forfeit the lease. In that event, a landlord must allow the relevant period to pass – usually 14 or 21 days after the due date for the rent – before any steps are taken towards forfeiture.
Statutory requirements
Landlords have to comply with the requirements of section 146 of the Law of Property Act 1925 for all breaches of a lease other than the non-payment of rent. This means that, for breaches such as alterations or alienation without consent, a landlord must give notice to his tenant of his intention to forfeit the lease – commonly known as a Section 146 Notice. A Section 146 Notice sets out how the tenant has breached the lease and, if the breach can be remedied, the notice requires the tenant to remedy it. The notice generally also demands compensation for the breach.
A landlord will have an extra hurdle to satisfy where the tenant has breached its repairing covenants and the lease is for a term of seven years or more with at least three years left. These rules are imposed by the Leasehold Property (Repairs) Act 1938 and they give the tenant the right to serve a counter-notice to a landlord’s Section 146 Notice. If a counter-notice is served, the landlord will need leave of the court before it can forfeit the lease. In practice, this often makes it extremely difficult to forfeit in such cases.
Landlords face additional barriers where they wish to forfeit a long lease of a dwelling – as a result of the Commonhold and Leasehold Reform Act 2002. Under sections 168 and 170, landlords of such leases are no longer entitled to exercise a right of re-entry or forfeiture against a defaulting tenant (or to serve a Section 146 Notice, if required) unless and until the breach has been admitted by the tenant, determined by the court (eg the landlord obtains a judgment in respect of the arrears) or determined by the First-Tier Tribunal (Property Chamber) (formerly known as the Leasehold Valuation Tribunal). The landlord must then wait 14 days after the final determination before serving the Section 146 Notice and/or taking steps to forfeit the lease.
Where the breach is non-payment of rent, the landlord does not need to serve a Section 146 Notice in order to forfeit the lease, provided that either: (a) the rent has been demanded; or (b) the lease expressly dispenses with the need to demand rent (which is the usual situation); or (c) (under section 210 of the Common Law Procedure Act 1852) the tenant owes at least six months’ rent and there are insufficient goods on the premises to distrain against to settle those arrears.
However, the 2002 Act imposes additional hurdles of which landlords of dwellings held under long leases need to be aware if they are intending to pursue forfeiture action for non-payment of rent. For example, under section 167, a landlord is not permitted to forfeit a long lease of a dwelling for arrears of less than £350 unless the sum has been outstanding for more than three years. In addition, section 166 contains detailed requirements as to how and when such tenants are to be given notice of the rent for which they are liable and the date on which payment is due. A landlord who pursues forfeiture action may have to give evidence in any later legal proceedings to confirm that these requirements were complied with.
Landlords of commercial property do not have to comply with these complicated requirements of the 2002 Act and are not usually required to serve a Section 146 Notice for non-payment of rent, consequently they often have the option of using the element of surprise when forfeiting a lease where arrears are owed. In particular, they may decide to change the locks to the property and deny entry to the tenant until such time as the arrears have been settled.
Insolvency legislation
A final point to consider on the relevant legislation is that certain insolvency regimes restrict a landlord from being entitled to forfeit a lease. One of the most common situations is where a tenant company is placed into administration, in which case the landlord is faced with a moratorium on enforcement action as a result of Schedule B1 to the Insolvency Act 1986 (as amended by the Enterprise Act 2002). This means that a landlord needs to have permission from the court or consent from the administrator before it can forfeit the lease in these circumstances. Other sections of the 1986 Act impose similar restrictions when dealing with other forms of insolvency, in particular where there is compulsory liquidation of a company or when a bankruptcy petition is filed against an individual.
Remedying the breach
As mentioned above, a Section 146 Notice will require a tenant to remedy the specified breach if it is considered capable of remedy. There are two types of breach: remediable and irremediable. A breach of a positive covenant will usually be treated as the former, provided that it is remedied within a reasonable time. However, a breach will usually be regarded as irremediable where there has been a breach of a negative covenant which attaches a stigma to the demised premises that is not capable of being immediately rectified. Every case turns on its own circumstances but the table below lists some of the common breaches and the category they generally fall into.
| Breach | Category |
|---|---|
| Non-payment of rent | Remediable |
| Unauthorised assignment | Irremediable |
| Unauthorised subletting | Irremediable |
| Other unlawful sharing of occupation | Remediable |
| Unauthorised alterations | Remediable |
| Failure to keep/put premises in repair | Remediable |
| Illegal/immoral use | Irremediable |
| Other unauthorised use | Remediable |
| Insolvency | Irremediable |
The distinction between a remediable and irremediable breach is important because, if the breach is irremediable, a landlord can forfeit almost immediately. However, if there is a remediable breach, the landlord has to allow the tenant a reasonable period in which to rectify it before effecting forfeiture.
The next step
Once a landlord reaches the stage where it is satisfied that it has a right to forfeit, it will need to ensure that it preserves that right. The next instalment will cover avoiding waiver of the right to forfeit and will appear in EG on 14 December.
Why this matters
Forfeiture can be a potent tool for dealing with a defaulting tenant. However, before this option can be pursued, the details of the lease and the relevant statutory requirements need to be checked carefully. Otherwise, a landlord risks forfeiting the lease without any right to do so and the tenant may then claim damages for loss suffered as a result.
While lease provisions relating to forfeiture are often fairly standard, it is important to check that they cover the relevant breach situation. In terms of legislative restrictions, landlords need to remember that a notice under section 146 of the Law of Property Act 1925 will generally need to be served before any step towards forfeiture can be taken – although this is not normally required where the breach is non-payment of rent.
Landlords of premises let as a dwelling under a long lease need to be particularly aware of the relevant statutory requirements which affect their right to forfeit. For example, such landlords are not entitled to serve a Section 146 Notice or take any other steps towards forfeiture until such time as the breach has been admitted by the tenant or determined by the court or First-Tier Tribunal (Property Chamber). Those advising landlords will also need to ensure that all relevant formalities imposed by the Commonhold and Leasehold Reform Act 2002 have been complied with when demanding rent and before taking steps to forfeit the lease.
Despite the complexity of the law in this field, forfeiture is a remedy worth considering. The threat of forfeiture alone can be enough to encourage a tenant to take steps to remedy a breach situation. With non-payment of rent under a lease of commercial premises, notice of the landlord’s intention to forfeit is not usually required and this often allows landlords to put even greater pressure on their tenants. In particular, a landlord of commercial premises may decide to change the locks to the property. This direct impact on the tenant’s business often leads to payment of the arrears owed, although it can also mean the end of the parties’ relationship.
Further reading
Section 146, Law of Property Act 1925
Sections 166-170, Commonhold and Leasehold Reform Act 2002
Insolvency Act 1986
Lazari GP Ltd v Jervis [2012] EWHC ?1466 (Ch)
Emma Humphreys is a partner at Charles Russell LLP
