Landlord and tenant – Commercial lease – Relief from forfeiture – Respondent landlord seeking to forfeit appellants’ headlease of seven retail units for breach of covenant – Respondent alleging nuisance and subletting without consent – Section 146(2) of the Law of Property Act 1925 – Whether appropriate to grant relief from forfeiture – Correct approach to exercise of court’s discretion – Appeal allowed
The appellants held a headlease of seven commercial retail units forming part of a block of flats in London, W14. The respondent was the lessor under the appellants’ lease and also under the long leases on which the individual flats were let. The appellants’ lease was for a term of 99 years, granted in 1982 on payment of a premium, and no further rent was payable save for an annual insurance rent. A rack-rent of £133,000 was achievable from subletting the units.
One of the retail units was sublet to a Chinese restaurant. The respondent made numerous complaints about the way the restaurant was run, including poor waste management, smoking and food preparation in a courtyard and noisy air-conditioning units. In late 2011, the appellant also granted a future sublease to the existing sublessees of the restaurant without first obtaining the respondent’s consent, contrary to the alienation provisions in the headlease.
In 2012, the respondent served valid notices under section 146(2) of the Law of Property Act 1925 to forfeit the headlease for breach of covenant. The appellants applied to the county court for relief from forfeiture, arguing that they had attempted to rectify the situation and that the respondent would receive an uncovenanted windfall of £1m to £2m if the headlease was forfeited. They eventually procured the surrender of the future sublease but, by then, judgment had already been given on their relief application. The judge found that the running of the Chinese restaurant had caused nuisance and annoyance to the residential lessees, in breach of covenant, and that the appellants’ failure to seek the respondent’s consent to the future sublease was a deliberate breach of the alienation provisions in the headlease. In light of those matters and his view of the appellants’ attitude, he declined to grant relief from forfeiture.
The judge also refused a further application by the appellants for relief on a different basis, namely that they be given six months to complete a sale and assignment of the headlease, failing which it would be surrendered. He rejected the appellants’ arguments concerning the value of the headlease, finding that its value was nil where he had refused relief from forfeiture. The appellant appealed.
Held: The appeal was allowed.
Relief from forfeiture under section 146(2) of the 1925 Act was discretionary and thus the conduct of the lessee was relevant. The discretion to grant relief was very wide and was not to be subjected to rigid rules. The fact that a breach of covenant was deliberate was a relevant consideration but did not preclude the grant of relief and there was no requirement to show special circumstances to justify the grant of relief in such a case: Southern Depot Co Ltd v British Railways Board [1990] 2 EGLR 39 applied. The value of the leasehold interest was also relevant. As a matter of principle, the exercise of the court’s wide discretion should not enable the landlord to take advantage of a breach by which it was not irreparably damaged. However, it was not enough to find that forfeiture would result in a windfall to the landlord. That was merely one consideration which had to be weighed against the seriousness of the tenant’s conduct when considering whether forfeiture was proportionate: Hyman v Rose [1912] AC 623 and Magnic Ltd v Mahmood Ul-Hassan [2015] EWCA Civ 224 applied.
Accordingly, once it was appreciated that the value of the headlease represented an advantage which the respondent would obtain from forfeiture, it had to be thrown into the balance with all the other circumstances. The judge had failed to carry out that exercise. He had taken the view that there was no injustice in refusing the application to have time to sell the headlease since the appellants were simply reaping what they had sown. That assessment left out of account the advantage which the respondent would obtain from the forfeiture. The judge had failed to consider the possibility that there should be no forfeiture if the leasehold interest could be sold on suitable conditions. Had he done that, he would have seen that it presented a way of resolving the conflict between the lessor’s right to enforce its right of re-entry and the lessees’ right not to be required to give the lessor some uncovenanted benefit.
The judge had also misdirected himself as to the value of the leasehold interest by finding that the value was nil because he had just denied relief from forfeiture. The headlease was not a flawed asset if the court gave relief from forfeiture for the purposes of sale, which was what it was being asked to do.
On the evidence, the retail units were now being properly managed following the appellants’ appointment of a managing agent. The respondent was well protected by that appointment for the limited period that would be necessary for a sale. That period should be fixed at six months, which should be long enough for the appellants to take any preparatory steps that they wished to take before sale. Unless contracts for the sale of the leasehold interest were executed within six months, the order dismissing the application for relief would come into effect. The assignment to the proposed purchaser should be subject to the respondent’s consent, not to be unreasonably withheld. The appellants were to instruct professional agents for the purposes of sale, with the manner and terms of sale to be fixed by those agents having consulted both the lessor and the lessees, and with the respondent having liberty to bid. The proceeds of sale should be held for payment first of any expenses or other sums that the appellants were liable to pay to the respondent.
Mark Warwick QC and Caroline Shea (instructed by Bude Nathan Iwanier) appeared for the appellants; Caroline Hutton and Jennifer Meech (instructed by Beavis Partnership Limited LLP) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Freifeld and another v West Kensington Court Ltd
