In round three of their new monthly column, Jonathan Seitler QC and Miriam Seitler debate moot points in property law. This week, forfeiture.
Question: Is forfeiture ever actually worthwhile?
YES: Jonathan Seitler QC argues that forfeiture is an important weapon in any landlord’s armoury, for five reasons.
1. A landlord’s right to forfeit is a right, which has to be expressed in the lease, to bring the term of the lease to an end prematurely if certain events occur. Commonly, these involve either the default of the tenant in complying with its covenants under the lease or an act of insolvency on the part of the tenant.
The point about forfeiture is that, as regards the tenant, forfeiture “keeps it honest”. The value of the remedy is its deterrent value. Hopefully, that deterrent will never have to be used. But its mere presence keeps the tenant in line.
2. In particular, owners of and investors in real property just love the dynamism of a physical re-entry. It changes the facts on the ground immediately in a way that is rare in the legal world. Solicitors’ letters often fail to yield results in themselves, especially when sent to a recalcitrant or impoverished tenant. Issuing proceedings against the tenant takes time and is expensive. But changing the locks in the middle of the night at the weekend is, relatively speaking, exhilarating. Instant results: when else can a landlord’s lawyers deliver that?
Even forfeiture by the issue and service of proceedings will get the parties before a judge in the County Court relatively quickly; this will vary from court to court but the Civil Procedure Rules (CPR) provide that the standard period between the issue of the claim form and the hearing – for all possession hearings including forfeiture – will be not more than eight weeks: CPR Rule 55.5(3)(b). This gives the landlord an early opportunity to persuade a district judge to make an order for possession.
3. Even if a tenant somehow manages to swerve a forfeiture, the ancient rules associated with the doctrine ensure that in most cases the tenant will still be ordered to pay the legal costs of the exercise on the basis that it was the tenant’s default that started the whole process off in the first place. Costs will usually be payable by the tenant on the indemnity basis: Patel v K&J Restaurants Ltd [2010] EWCA Civ 1211; [2010] PLSCS 276.
Furthermore, most leases contain provisions requiring the tenant to meet the costs, for instance, of preparing a section 146 notice. A court is likely to give effect to such a clause – Church Commissioners for England v Ibrahim [1997] 1 EGLR 13 – even where the CPR otherwise restricts the costs recoverable, for example on the small claims track: Chaplair Ltd v Kumari [2015] EWCA Civ 798; [2015] PLSCS 23. In terms of risk and costs, therefore (and which terms are more important in litigation?), forfeiture is a free hit for a landlord.
4. Even if the proceedings or re-entry are unsuccessful in obtaining vacant possession because the tenant is granted relief, strictly drafted terms of relief will ultimately achieve the landlord’s objective of ensuring compliance with the covenants.
The terms of relief should aim to put the landlord in the position as if there had been no breach and no forfeiture. If the tenant is unable to, or refuses, to comply with these terms, the application for relief will stand dismissed and the possession order will kick in, allowing recovery of possession.
There is significant scope for creativity in the terms of relief, including, for example, that the lease be assigned within a reasonable time period to an assignee acceptable to the landlord: Freifeld and another v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] EGLR 60. A successful forfeiture should achieve either recovery of possession or covenant compliance.
5. If a landlord regrets its decision to forfeit, the decision is not necessarily irreversible. A landlord may be able to achieve the desired effect of pressuring the tenant into compliance but not actually bringing the lease to an end. The landlord succeeded in this in Mount Cook Land Ltd v Media Business Centre Ltd [2004] EWHC 346 (Ch) where it forfeited by the issue and service of proceedings but later found out about a rent review outcome in its favour. The forfeiture was disputed by the tenant and the landlord discontinued the proceedings to take advantage of the rent review. The court held that the lease had not been irreversibly forfeited and the lease lived on, without the need for relief to be granted.
NO: Miriam Seitler contends that forfeiture never works in practice and it is so full of obsolete rules as to make it a legal minefield.
1. Anyone who thinks that forfeiture works in practice has lost contact with the reality at the coal face of litigation: the county courts. What happens on the ground, before actual district judges and circuit judges, reflects the axiom “the law abhors a forfeiture” (which has its genesis in Goodright d Walter v Davids [1778] 98 ER 1371. In practice, courts always lean against allowing forfeiture to occur and the landlord to obtain a windfall. District judges laugh in the face of a landlord who asks them to determine issues of breach, waiver and relief in 15 minutes in a lengthy possession list.
2. There are so many rules around forfeiture that there is never any shortage of pretexts for a court to block a landlord’s attempt to forfeit a lease. A section 146 notice (under the Law and Property Act 1925 (the 1925 Act)) is a prerequisite for forfeiting for all breaches of non-rent covenants. It is a formal notice which sets out certain statutorily required information. Landlords must get right the destination and contents of such a notice and wait a reasonable time before commencing proceedings: Anders v Haralambous [2013] EWHC 2676 (QB) illustrates the importance of accuracy in such a notice. This notice can present a stumbling block to a landlord acting too quickly.
3.There are additional hurdles for a landlord when forfeiting a long lease of residential premises: section 167 of the Commonhold and Leasehold Reform Act 2002 (the 2002 Act) limits the forfeiture on the grounds of arrears of rent, service charge or administration charge unless they exceed a certain level or have been present for a certain period.
Section 168 of the 2002 Act restricts the right to serve a section 146 notice in respect of a tenant’s breach of covenant in relation to a long lease of a dwelling: such a notice may only be served if the tenant has admitted the breach or it has been finally determined on an application that the breach has occurred. The application is usually made to the First-tier Tribunal. This therefore is another layer of litigation in the case of such premises.
4. It is very easy for a landlord accidentally to waive a right to forfeit. The landlord waives its right to forfeit when doing something or saying something to the tenant, with knowledge of the cause of the entitlement to forfeit, which is unambiguous and which, viewed objectively, is only consistent with an intention to treat the tenancy as continuing.
The important part of that definition is the fact that the question of waiver has to be “viewed objectively”. It does not matter how egregious is the breach of covenant nor whether the landlord intended to waive it. Waiver happens irrespective of the landlord’s subjective intention.
Potential acts of waiver include demanding or accepting rent, relying on rights under commercial rent arrears recovery (CRAR), granting licences to assign or sub-let, serving notices under other Acts and seeking an injunction. Rent cannot be demanded or accepted “without prejudice” to the forfeiture of the lease: Central Estates (Belgravia) Ltd v Woolgar [1971] 220 EG 803.
5. Physical re-entry is as high-risk as it ever gets because (a) it can only be used for entirely non-residential property; and (b) even in the case of commercial property, it has to be effected without violence to person or property. A physical re-entry which contravenes these requirements is a criminal offence, punishable by imprisonment: see Protection from Eviction Act 1977, section 6 of the Criminal Law Act 1977 and Pirabakaran v Patel [2006] 3 EGLR 23. Furthermore, mixed-use premises are, for these purposes, treated as if residential. The result is that the landlord only has to get one of (a) or (b) wrong, and the boot will most definitely be on the tenant’s foot. And it could have a policeman attached to it.
6. Another of the huge risks associated with forfeiture is that once the lease is forfeited the tenant can choose to accept it and walk away from the lease. The landlord needs to be sure that it can re-let on a more favourable basis: forfeiture is unique among other remedies, such as damages or an injunction, in that it might actually be welcome to the tenant.
7. Finally, even if the landlord manages to clear all those hurdles, a tenant is very likely in most cases to obtain an order for relief from forfeiture – see Freifeld and Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224 for a recent example. Such relief is available in the case of forfeiture for breaches other than to pay rent under section 146(2) of the 1925 Act. The position is governed by different statutory provisions in the case of forfeiture for non-payment of rent: sections 138 and 139 of the County Courts Act 1984 and (for High Court cases) section 38(1) of the Senior Courts Act 1981.
The reality is that relief is granted, usually on terms that the breach is remedied in full so as to put the landlord back into the position it would have been in had there been no breach, unless the breach is so severe and sustained that the court is persuaded that the tenant is either viscerally unwilling or fundamentally unable, to comply with its covenants under the lease. This rarely happens.
Ultimately, therefore, forfeiture rarely advances a landlord’s position. It is often just so much hot air.
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Jonathan Seitler QC is a barrister at Wilberforce Chambers and Miriam Seitler is a barrister at Landmark Chambers
