Chloe Benson looks at the legal implications following forfeiture of a lease, and the practical considerations where a tenant wants to return to premises after it remedies its breach
Key points
- Only the court can grant relief from forfeiture to reinstate the old lease
- Landlords should therefore insist that their tenant makes an application to the court for relief
- If the tenant wants to go back into occupation before relief is granted by the court, landlords may want to consider granting the tenant a tenancy at will and request an undertaking that the tenant will apply for relief
- Parties should consider agreeing terms for relief between them so that the tenant can provide a draft consent order to the court with its application
You may have read 2015’s Mainly for Students article on the topic of forfeiture (“Don’t lose out”, EG, 4 July 2015, p88) which focused on preserving a landlord’s right to forfeit. But what happens once a lease has been forfeited? Whether you are acting for landlord or tenant, it is important to ensure that the correct steps are followed in those circumstances according to your client’s objectives, bearing in mind that forfeiture is an unequivocal event that terminates the lease. Parties often assume that the tenant can simply return to the premises without any formalities once the breach is remedied, but there can be risks with such an approach and these need to be carefully considered.
Forfeiture due to non-payment of rent
A common reason for a landlord to take steps to forfeit the lease is due to its tenant’s failure to pay the rent on time. A lease will usually contain an express provision reserving the landlord’s right to forfeit the lease for this type of breach of covenant. In some circumstances, the landlord may decide to use peaceable re-entry in order to effect forfeiture (ie taking physical possession of the property by changing the locks) rather than by applying to court and obtaining an order for possession. Forfeiture by peaceable re-entry determines a tenant’s lease with immediate effect, albeit subject to the tenant’s right to seek relief.
What happens if a tenant remedies its breach?
Once a landlord has forfeited a lease, it may subsequently be faced with a scenario where its tenant offers to pay the outstanding rent due as soon as possible so that it can go back to running its business. Many parties tend to assume that a lease will simply be reinstated once a tenant returns to occupation. However, if the parties simply agree to relief from forfeiture without obtaining a court order, it will not resurrect the original lease but instead create a new tenancy. More crucially, it is likely that the new tenancy will have security of tenure under the Landlord and Tenant Act 1954 as the contracting out procedure for the new tenancy will not have been followed.
To avoid this risk the tenant should make an application to the court for relief from forfeiture under section 139(2) of the County Courts Act 1984. For any landlords that might be tempted to agree relief from forfeiture with their tenant and allow it to return to the premises without the tenant incurring costs on making this type of court application, the case of Zestcrest Ltd v County Hall Green Ventures Ltd [2011] 3 EGLR 9 is essential reading.
In this case, the landlord re-entered the property after the tenant had failed to pay its rent. The tenant settled the arrears but the landlord insisted that the tenant should make an application to the court for relief from forfeiture in accordance with section 139. One of the landlord’s concerns was that making an informal agreement with the tenant could have the effect of granting a new tenancy with security of tenure.
The tenant proceeded to make its application to the court for relief from forfeiture but sought to recover its legal costs from the landlord on an indemnity basis. This claim for indemnity costs was based on its view that the application was unnecessary as the parties could have simply agreed relief from forfeiture between themselves and allowed the tenant to return to the premises. The county court disagreed with this view and found in favour of the landlord. It confirmed that a court order is the appropriate route to resurrect a forfeited lease and avoid a new tenancy being created, with potentially adverse consequences for the landlord. The court held that it was therefore reasonable for the landlord to require the tenant to obtain a court order and costs were awarded in the landlord’s favour in accordance with the usual approach under section 139.
Other possible risks
Of course, there are other potential issues to be aware of in the event that parties fail to follow the correct legal procedure for restoring a lease after forfeiture. For example, any guarantor will be released from its obligations once a lease is forfeited and its liability can only be reimposed through the proper reinstatement of the lease. This could be particularly problematic if the forfeited lease was an “old lease” for the purpose of the Landlord and Tenant (Covenants) Act 1995, because any covenants from previous tenants or guarantors would be lost, meaning that a landlord would be unable to bring an action against them in the event of a future breach.
In addition, the terms of any new tenancy once a tenant returns to premises without formal reinstatement of the lease may well be uncertain and open to argument. This uncertainty would extend to important provisions, such as those relating to rent review. If there is a rent deposit in place, it is likely that the rent deposit deed will specifically refer to the forfeited lease, meaning that a new deed (or supplemental agreement) would need to be entered into to avoid the tenant arguing that the deposit cannot be used in respect of any breaches of the new tenancy created by its informal return to the premises.
It is also important to bear in mind that it is not only landlords that face potential risks in these circumstances. One possible issue for tenants from any such informal return to the premises is that stamp duty land tax may be payable on the new tenancy.
Practical considerations
The fact that a tenant may need to apply to the court for relief from forfeiture can cause practical issues for the parties concerning the tenant’s occupation of the property. The tenant will not want to be in a position where it has to wait for the court to grant relief before it is able to reoccupy the property. This therefore raises the question of what the parties can do for this interim period between forfeiture of the lease and the court granting relief. In Zestcrest, the landlord offered to grant the tenant a tenancy at will in order to enable it to resume occupation of the property without interrupting its business activities, subject to an undertaking by the tenant to make the necessary application and to pay the landlord’s costs.
It is worth the parties considering whether this type of agreement can be reached between themselves pending approval by the court. For example, the parties may agree that the tenant is to occupy the property as a tenant at will on condition that the tenant is required to pay all arrears up to date with interest and the landlord’s legal costs. If such terms can be agreed, then the landlord is likely to be willing to consent to relief. The agreement can then be documented by way of a Tomlin order and then submitted to the court as part of the tenant’s application for relief from forfeiture. This will allow the court application to proceed smoothly and save the parties the time and costs of attending a hearing.
Why this matters
It is important for landlords and tenants to remember that a lease should be reinstated after forfeiture through a proper application for relief made to the court. There can be potentially significant consequences for both parties if no such application is made and the tenant simply returns to the premises. Examples of these consequences include:
- If the tenant is let back into occupation then it is likely that the new tenancy will attract the protection of the Landlord and Tenant Act 1954. This is of particular importance if the old lease was a contracted out lease.
- Any guarantees under the old lease will have been released when it was brought to an end through forfeiture.
- New consents to the lease may be required (either from a mortgagor or freeholder). Failure to obtain any consents required for the grant of a new lease could place the landlord in breach of its banking covenants and/or jeopardise the continuation of any superior lease.
- Rent reviews may be affected.
- It may have an impact on the tenant’s repairing and reinstatement obligations at the end of the lease.
- There may be an effect on rent deposit arrangements.
- There may be stamp duty land tax payable on the new tenancy.
Who needs to know?
- Legal professionals acting on behalf of both landlords and tenants
- Commercial managing agents
- Commercial landlords
- Commercial tenants
Leading cases
- Tayleur v Wildin (1868) LR 3 Ex 303
- Zestcrest Ltd v County Hall Green Ventures Ltd [2011] 3 EGLR 9
- Freifeld and another v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] EGLR 60
Chloe Benson is an associate at Charles Russell Speechlys LLP