In the second of a four-part series on forfeiture, Peter Petts and Jamal Demachkie explore the restrictions that exist for those seeking to exercise it.
The title of this article is deliberately nuanced, as there is fevered debate as to whether the right to forfeit arises on the tenant’s forfeiting act or that right only arises once the landlord has jumped through the statutory hoops which it is required to, before re-entering, either peaceably or by the service of proceedings. The distinction is an important one, as a landlord can only waive the right to forfeit once that right has arisen. If that right does not arise until he has jumped through the hoops, there is no question of it waiving the right to forfeit, in the interim.
This article considers, with a modicum of bias, the competing arguments and the authorities in respect of two significant examples of the restrictions on exercising the right to forfeit: section 146(1) of the Law of Property Act 1925 (notice of breach), and section 81 of the Housing Act 1996 (determination of service or administration charges payable).
Segal Securities
Much misunderstanding has been caused in this area by the misinterpretation of the judgment of Sachs J in Segal Securities Ltd v Thoseby [1963] 1 QB 887, and the failure to distinguish between continuing and remediable breaches (to be considered in the next article in this series).
In Segal Securities, Sachs J held that there had been no waiver by the demand for rent, during the currency of a section 146 notice, because sharing possession was a continuing breach, which had not been remedied. Therefore, even though the demand for rent waived the right to forfeit in respect of the past sharing, it did not waive it in respect of the future sharing, which continued up to, and beyond, the service of proceedings.
Although Sachs J made clear his decision was based on the breach being continuing, and made no reference to whether or not the breach was remediable, Segal Securities has been erroneously cited as authority for the proposition that a remediable breach may not be waived during the currency of a section 146 notice. A recent example is Stemp v Ladbroke Gardens Management Ltd [2018] UKUT 375 (LC); [2018] PLSCS 215, where the judge appears to have been led astray by an extract from Woodfall: Landlord and Tenant, which cites Segal Securities and other authorities that turned on the breach in question being continuing rather than remediable.
Other authorities
There is no authority for the proposition that the currency of a section 146 impacts on the waiver of the right to forfeit. On the contrary, Lightman J rejected the submission that, as a right to enforce did not arise until the section 146 notice had expired, there could be no waiver before that date. “It is sufficient that the right to forfeit has arisen”, as opposed to a right to enforce: First Penthouse Ltd v Channel Hotels & Properties (UK) Ltd [2003] EWHC 2713 (Ch); [2004] 1 EGLR 16 (upheld on appeal: [2004] L&TR 27). In Yorkshire Metropolitan Properties Ltd v Co-operative Retail Services Ltd [1997] PLSCS 102, the alleged waiver was during the currency of a section 146 notice, but no point was taken. If there was a point to be taken, one would have thought the eminent judge, silks and juniors in the case would have spotted it.
Section 146(1) provides that the right to forfeit shall not be enforceable unless the notice is served. It expressly acknowledges that the right to forfeit has arisen and restricts its enforcement. There is no question of the right to forfeit having not arisen. Davey LJ, with whom Lord Esher MR agreed, considered that the predecessor to section 146(1) imposed “a fetter by way of condition precedent on the lessor wishing to enforce a right of re-entry or forfeiture”: Nind v Nineteenth Century Building Society [1894] 2 QB 226. A fetter is a restraint or impediment on enforcing the right, not an abrogation of the right.
However, this approach has been roundly rejected by the Court of Appeal in New Zealand: McDrury v Luporini [1999] NZCA 309, where the court was of the opinion that no election could be made until the landlord had an unfettered right to forfeit. As such, where the equivalent of a section 146 notice was required to be served, no waiver could arise prior to, or during the currency of, such a notice. The court considered that if it were the case that a landlord held off serving a notice for an inordinate period of time, while accepting rent, it was open to the tenant to rely on estoppel. (What the representation and detrimental reliance might be was not discussed.) The court was also of the view that after the service of the notice, the tenant would be fully aware of the landlord’s intention to forfeit, so, objectively, the tenant would not be led to believe that the lease was continuing, during the currency of the notice, even if the landlord was still accepting rent.
There is no dispute that a landlord cannot waive the right to forfeit before it has arisen: if a lease requires rent to be in arrear for 21 days before a landlord can re-enter, the landlord cannot waive the right to forfeit until those 21 days have passed. The divergence of opinion is on whether the landlord must have a right unfettered by statutory shackles before he can waive the right to forfeit.
In this jurisdiction, there is no authority to the effect that a landlord cannot waive the right to forfeit before, during or after the currency of a section 146 notice.
There are various other statutory fetters on the right to forfeit. It is a common perception that if a landlord is precluded from forfeiting until it has complied with a statutory procedure, it cannot waive the right to forfeit until that procedure is complete, as, until that time, there is no election to be made.
That raises the question: if there is nothing to stop a landlord from waiving the right to forfeit during the currency of a section 146 notice, why should it be any different for other statutory fetters? In Stemp, HHJ Huskinson found there was no difference.
Stemp
The case concerned the recovery of costs incurred by a residential landlord in contemplation of serving a section 146 notice on one of its tenants for failure to pay service charge. Prior to serving the notice, the landlord was obliged to obtain a determination from the First-tier Tribunal that the failure amounted to a breach of the lease (section 81 of the Housing Act 1996), which took nearly eight months. The tenant covenanted to pay the landlord’s costs incurred in contemplation of service of a section 146 notice. However, the tenant claimed that it was not obliged to pay any, or part, of the costs of that exercise, the landlord having waived the right to forfeit during the eight-month wait for a determination.
The decision in Stemp has been criticised (see, for example, Hill and Redman’s Law of Landlord and Tenant). Three points are raised:
- it is not possible to elect until one is in a position to choose;
- if the landlord can elect to treat the lease as continuing before the statutory restrictions are complied with, a section 146 notice should be a waiver, as it recognises the lease is continuing; and
- the tribunal’s own recognition that the position with section 146 notices may be different illuminates the internal illogicality.
Such criticism, it is suggested, is unjustified.
First, as Lord Bridge stated in Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (The Kanchenjunga) [1990] 1 Lloyd’s Rep 391, when considering the different meanings of waiver:
“In the present case, we are concerned with an election which may arise in the context of a binding contract, when a state of affairs comes into existence in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision, being a matter of choice for him, is called in law an election. Characteristically, this state of affairs arises where the other party has repudiated the contract or has otherwise committed a breach of the contract which entitles the innocent party to bring it to an end…”
In the case of a lease, the landlord’s choice, and right to forfeit, arises when the landlord has knowledge of the tenant’s breach. It is only by exercising that choice that the statutory fetters come into play, before the landlord’s choice is made irrevocably final by re-entering the property. That the statutory compliance causes a hiatus in the landlord’s election process is no reason to prevent the landlord waiving its right to forfeit. The landlord has the right to forfeit, it is just unable, in the case of section 81, to exercise that right, until the tribunal has determined the breach.
Secondly, far from being inconsistent with section 146 notices, judicial reasoning recognises the distinction between having the right to forfeit and exercising that right: First Penthouse. Rather than recognising the continuance of the lease, the service of a section 146 notice has long been held to be the landlord proceeding to enforce a right of re-entry or forfeiture: Pakwood Transport Ltd v 15 Beauchamp Place Ltd [1978] 1 EGLR 27. It is inconceivable that a landlord who is proceeding to enforce a right of forfeiture can be said to have unequivocally elected to treat the lease as continuing.
Finally, the tribunal did raise the possible need to treat section 146 notices differently to other statutory restrictions. That comment was made in reliance on the erroneous interpretation of Segal Securities, as mentioned above. There is no need to distinguish between the hiatus in forfeiting a lease caused by a section 146 notice and any other statutory process with which a landlord must comply.
It is interesting to note the drafting of the Coronavirus Act 2020, section 82 of which provides:
(1) A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.
(2) During the relevant period, no conduct by or on behalf of a landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent.
Section 82(1) fetters the enforcement of the right to forfeit. If a landlord cannot waive the right to forfeit, while its right is so fettered, there would be no need for section 82(2).
Unless the landlord waives the right to forfeit by accepting or demanding rent, it is unlikely, having served a section 146 notice or commenced proceedings for a determination of the tenant’s breach, that a landlord’s conduct is going to be so unequivocal as to give rise to the inference that the landlord is treating the lease as subsisting despite actively trying to bring it to an end.
In Stemp, the landlord did waive by demanding a service charge, which was reserved as rent, while waiting for the tribunal’s determination. That may seem harsh on the landlord, but forfeiting a long, residential lease is even harsher on the tenant. The landlord did not have to seek recovery of its costs with the sledgehammer of forfeiture: it could have sued for the debt. That said, the tenants’ conduct in Stemp did not appear to be deserving of any sympathy.
Whatever the rights or wrongs of Stemp, it is authority – binding on the First-tier Tribunal, probably binding on the County Court, and persuasive in the High Court – that the right to forfeit may be waived, while the landlord overcomes the statutory hurdles before forfeiting. In any event, until such time as there is higher authority that a landlord cannot waive the right to forfeit prior to, or during the currency of, a section 146 notice, it is inconceivable that Stemp was wrongly decided.
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).
Part one: Doubling down on forfeiture
Next week: A look at the failure to distinguish between continuing and remediable breaches
