Landlord and tenant – Relief from forfeiture – Rent arrears – Claimant tenant granted call option for new lease of business premises – Claimant falling into arrears of rent – Defendant landlords exercising right to terminate option relying on rent arrears – Claimant seeking relief from forfeiture – Whether termination clause in option agreement was forfeiture provision in respect of which court grant relief from forfeiture – Claim allowed
The claimant held a lease of a property at 8 Lancashire Court, Mayfair, W1, from which it ran a restaurant and hospitality business. On 24 March 2011, the claimant’s landlord granted the claimant an option to call for a renewal of the lease when it expired in 2024. The option included a termination provision entitling the landlord to terminate the option if the claimant fell into arrears of rent. The defendants acquired the freehold subject to the lease and the option and became the claimant’s immediate landlord.
In 2020 and 2021, the claimant fell into arrears of rent. The defendants had consulted about a redevelopment scheme, to be completed by July 2025, which would involve the demolition and rebuilding of the property. They terminated the option in reliance on the rent arrears but did not seek to forfeit the lease.
The claimant settled the outstanding arrears on 12 August 2021 and sought relief from forfeiture. The main issue was whether a clause in an option agreement which permitted a grantor (or its successor-in-title) to terminate the option on the grantee’s default of its obligations in a related lease was a forfeiture provision in respect of which the court could grant relief from forfeiture.
The defendants argued the court had no jurisdiction to grant relief because: the option did not create a proprietary interest; or did not create a sufficiently proprietary interest for the jurisdiction to grant relief to be engaged; or the termination provision did not represent a security for the performance of the obligations in the lease.
Held: The claim was allowed.
(1) For the court to have jurisdiction to grant relief from forfeiture, the claimant had to establish that at least two pre-conditions had been satisfied, namely, that: (i) by the option, it obtained a sufficient proprietary interest in the premises; and (ii) the operative provision secured the performance of the tenant covenants in the lease, in particular the rent payment obligation.
If the claimant proved that at least those two pre-conditions had been met, the court retained a discretion whether or not to grant relief from forfeiture, even if it was established that the court had the necessary jurisdiction to do so. That discretion involved a consideration of whether it would be unconscionable for the forfeiting party to rely on its strict legal rights.
If the claimant proved that the two preconditions had been met, and the court was otherwise minded to grant the claimant relief from forfeiture in exercise of its discretion, relief should be granted unconditionally. The central rationale and condition for the exercise of the remedy was that the primary object of the bargain should be the securing of a stated result, for which the forfeiture provision was added by way of security: Shiloh Spinners Ltd v Harding [1973] AC 691 and Vauxhall Motors Ltd v Manchester Ship Canal Co Ltd [2019] EGLR 51 considered.
(2) To satisfy the first pre-condition, the claimant only needed to establish that immediately before the service of the notice: it had a proprietary interest in the premises, by virtue of the option; the claimant’s relevant land interest was such a proprietary interest; so that the claimant had established the first pre-condition.
Immediately before the option was terminated by the notice, the claimant had a sufficient proprietary interest in the property. The claimant had caused the option to be noted against the registered title of the freehold interest in the premises.
When the option was granted, the parties to it were landlord and tenant under the lease. The purpose of the option was to permit the parties to call for, in the case of the tenant, and to put to the tenant, in the case of the landlord, a further lease of the premises. The parties to the option intended that the option and the lease would go hand-in-hand in practice. That ought to be inferred, not only from the context in which the option was granted, but also from the terms of the option itself.
(3) The operative provision permitted the option to be terminated if the conditions for the landlord to forfeit the lease existed. In the context in which the option was granted, it ought to be inferred that, in practice, the parties expected that, if the lease was forfeited, so the option was likely to be brought to an end.
It was not disputed that the forfeiture provision in the lease was intended to secure, and was in the nature of security for, the performance of the tenant covenants in the lease. Where a proprietary interest or a “proprietary or possessory right” (such as a patent or a lease) was granted or transferred subject to revocation or determination on breach, the clause providing for determination or revocation was a forfeiture: Cavendish Square Holding BV v Makdessi [2016] EGLR 15 considered.
A termination provision was in the nature of security where it operated on a breach of a primary obligation, particularly where the termination provision could operate indiscriminately and mirrored a forfeiture clause in a lease. The operative provision had all those qualities. It was intended to secure, and was security for, the performance of the tenant covenants in the lease, so that the second pre-condition had been established. To the extent that it could do so, the notice reinforced that conclusion setting out the relevant provisions of the forfeiture clause in the lease. It effectively asserted that the conditions for forfeiting the lease existed; and that, for that reason, the defendants gave notice to terminate the option.
(4) Save in exceptional circumstances the function of the court was to grant relief when all that was due for rent and costs has been paid up. The same applied where the breach for which forfeiture had occurred was non-payment of sums analogous to rent such as service charges: see Woodfall on Landlord and Tenant, at paragraph 17.181.
In the present case, it would be unconscionable for the defendants to retain the benefit of their termination of the option and the court should exercise my discretion in the claimant’s favour.
Mark Sefton KC (instructed by Mishcon de Reya LLP) appeared for the claimant; Katharine Holland KC (instructed by DAC Beachcroft LLP) appeared for the defendants.
Eileen O’Grady, barrister
Click here to read a transcript of Hush Brasseries Ltd v Rlukref Nominees (UK) One Ltd and another
