Now that the property market is generally improving, many landlords will be willing to consider ending arrangements with defaulting tenants and replacing them with better ones. In such cases, and in other circumstances, forfeiture can be an attractive route for terminating leases quickly. However, it is important that the right to use this helpful remedy is preserved as soon as a breach of lease is identified. If the right is waived, then this can mean that the opportunity to end the lease disappears.
Following the steps outlined below should help landlords to preserve their rights and avoid actions which will lose a right to forfeit.
Types of breach
On the question of preserving the right to forfeit, it is worth bearing in mind that there are two types of a breach of lease and one of these is more critical than the other when it comes to waiver.
Most breaches of lease will fall into the category of “once and for all” breaches, where waiver is fatal and the landlord will not get another right to forfeit unless and until there is another breach by the tenant. The other type is a “continuing” breach, which is generally not critical because the landlord’s right to forfeit can arise again the next day even after he has waived it. A common example of a continuing breach is breach of the covenant to repair.
Until the type of breach has been identified, landlords and their advisers should take a cautious approach to keep their options open. This means preserving the right to forfeit until the nature of the breach is established and there is an agreed strategy for how the landlord wishes to approach the situation.
Preserving the right to forfeit
To preserve the right to forfeit (once aware of a tenant’s breach), landlords and their representatives need to ensure that nothing is said or done which unequivocally recognises the continued existence of the lease. Waiver has nothing to do with the landlord’s intention; the test of whether the landlord has treated the lease as still existing is an objective one. Landlords also cannot rely on so-called “no waiver” in leases which purport to allow them to forfeit a lease even if the right has been waived; these clauses have no legal effect (see Expert Clothing Service & Sales Ltd v Hillgate House Ltd and another [1985] 2 EGLR 85).
Most surveyors know that the safest course for preserving the right to forfeit involves ensuring that no rent or other sums due under the lease are demanded or accepted, even on a without prejudice basis. In addition, there should ideally be no contact with the tenant or its representatives until the landlord has decided how it wishes to deal with the breach situation. If this is not practicable, landlords should at least ensure that communications with the tenant or its representatives are held on a without prejudice basis. However, even those communications must be treated carefully; the label of “without prejudice” is not a magic wand to allow you to get away with saying or doing anything.
What about cash flow?
In many instances, landlords will be concerned about the impact on cash flow of taking these steps and will hope that matters can be resolved through discussions with the tenant. While without prejudice negotiations are often sensible, deciding against preserving the right to forfeit can come at a heavy cost.
Once the landlord has lost the ability to threaten to terminate the lease, it will have a fairly weak negotiating position when seeking to persuade its tenant to remedy the breach. Moreover, a landlord that fails to protect its right to forfeit may well find itself left only with the unappealing options of allowing the breach to continue or incurring significant costs on court proceedings. For example, addressing a breach of the alienation covenant once the right to forfeit has been lost will generally require court proceedings to seek an injunction and/or damages if the tenant ignores requests to regularise the position.
In the case of non-payment of rent (which is a “once and for all” breach, but where the situation may arise reasonably regularly), some landlords will allow arrears to accumulate without preserving the right to forfeit. While it can be sensible to allow time to see whether a tenant can remedy an arrears situation, this scenario creates two possible disadvantages for a landlord:
• The tenant may be able to persuade the court that it is only required to pay the quarter’s rent for which the landlord has preserved its right to forfeit – and not any historic arrears in respect of which the right to forfeit has been lost – in order to obtain relief from forfeiture (see the comments of Neuberger LJ (as he then was) in Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504; [2007] 1 EGLR 31).
• Where the landlord wishes to recover possession so that it can re-let the premises to a better tenant, delaying forfeiture action creates the risk of giving the tenant sufficient time to get its house in order. If the tenant pays the next quarter’s rent on time, the landlord will not be entitled to forfeit the lease for non-payment of rent.
Common mistakes
Even once a landlord has decided that it will take steps to preserve the right to forfeit, mistakes can still be made. Examples of actions which will waive the right to forfeit include:
• demanding and/or accepting rent or other sums due under the lease;
• undertaking an inspection of the premises;
• progressing a consent or surrender transaction; and
• seeking an injunction to enforce a lease covenant.
Demanding and accepting rent
Demanding rent due in advance will generally waive the right to forfeit, even if it is done on a without prejudice basis. However, it has been held by the Court of Appeal that there is no waiver where a tenant does not receive a rent demand, as the act of waiver must actually be communicated to the tenant: Trustees of Henry Smith’s Charity v Wilson [1983] QB 316.
Similarly, any acceptance of rent due after the landlord becomes aware of the tenant’s breach will waive the right to forfeit, even if the rent is accepted by the landlord’s agent or bank against the landlord’s specific instructions. However, in a situation where a third party has accepted the money on its behalf, the landlord may be able to save its position if the money is returned to the tenant straight away. This is also the safest course if a cheque is received from the tenant.
The court will generally be unimpressed with devices such as accepting rent on a without prejudice basis or accepting payments from the tenant “for use and occupation of the premises”. However, case law supports a landlord’s right to accept rent or other monies payable under the lease which fell due before the landlord became aware of the tenant’s breach. Even so, a carefully worded letter should be sent to the tenant to explain the acceptance of any such sums.
Other dealings with the premises/tenancy
Breaches often arise during the course of negotiations for a consent required by the lease, such as where a subtenant goes into occupation of the premises before the landlord grants consent to the subletting. Openly negotiating and/or granting a consent required by the lease after discovery of such a breach will waive a landlord’s right to forfeit.
Breach situations can also sometimes prompt the parties to a lease to discuss the surrender of the lease back to the landlord. Landlords need to remember that, unless the negotiations are held on a without prejudice basis, these will waive the right to forfeit. Similarly, a landlord wishing to undertake an inspection of the premises while preserving the right to forfeit – perhaps to check on the occupation situation or for unlawful alterations – should ensure that any such request is made without prejudice to its rights.
Emma Humphreys is a partner at Charles Russell Speechlys LLP
