Allyson Colby analyses a tricky case on forfeiture relating to a café.
Key points
- The Court of Appeal has rejected arguments that forfeiture remains an option if a landlord discovers a breach of covenant and then accepts rent falling due in the period between the date of the breach and its discovery
- Accepting rent falling due after the breach, and possibly even demanding such rent, with knowledge of the breach, will put paid to the landlord’s ability to forfeit
- Consequently, landlords with knowledge of a breach should only demand and accept rents that fell due before the breach occurred
It has long been established that a landlord waives its right to forfeit a lease if it does something consistent only with the continuation of that lease, in full knowledge of the facts. So the acceptance of rent falling due after a landlord knows about a once-and-for-all breach of covenant will waive that breach.
But what is the position if a tenant commits a once-and-for-all breach of covenant in, say, January? The rent is payable on the usual quarter days, but is left unpaid, and the landlord discovers the breach in July, when the rent is still outstanding. Can the landlord demand, and be paid, the sums that fell due on 25 March and 24 June, while retaining its right to forfeit the lease, simply because it was ignorant of the breach on those dates?
The textbooks do not speak with one voice when considering whether demanding and accepting rent with knowledge of a breach constitutes a waiver if the rent fell due after the breach, but before the landlord had knowledge of it. And, although Mummery and Rix LLJ touched on this in Seahive Investments Ltd v Osibanjo [2008] EWCA Civ 1282; [2009] 1 EGLR 32, their opinions differed.
Unlawful subletting
The Court of Appeal’s decision in Faiz v Burnley Borough Council [2021] EWCA Civ 55; [2021] PLSCS 19 provides welcome clarification of the law. The litigation concerned a café at a historic country house owned by the council. The council let the café to tenants, who granted a sub-tenancy at some point in time between 20 May 2019 and early October 2019, in breach of the alienation provisions in their lease. They informed the council that they had done so on 18 October 2019 and the council served a section 146 notice on them on 30 October.
On 4 November, having demanded £2,845 from the tenants on 26 September to cover the cost of insuring up until 25 February 2020 when the tenants’ lease expired, the council issued a revised invoice for £1,826 for the period up until 18 October 2019. That sum was paid to and accepted by the council on 11 November 2019. But it re-entered the premises on 22 November 2019 – prompting the tenants to seek a declaration that the council had waived its right of re-entry by submitting a further insurance demand and/or by accepting payment of the sum demanded.
First principles
The Court of Appeal explained that leases are liable to forfeiture for breach of covenant, whether or not the landlord knows that a breach has been committed. Clearly, it will not forfeit unless it knows about the breach. But, if it chooses to forfeit, it is the breach that it relies on, and not the date of its discovery.
It followed that it does not matter whether the rent in question fell due before or after the discovery of the breach. What matters is whether the rent fell due before or after the date of the breach, of which the landlord now has knowledge. Therefore, possibly demanding – and certainly accepting – rent falling due after a once-and-for-all breach of covenant, with knowledge of that breach, will prevent the landlord from forfeiting its tenant’s lease.
So, going back to our initial example, if, in July, after discovering that the tenant had committed a once-and-for-all breach in January, the landlord were to demand and accept rent due on 25 March or 24 June, the landlord’s actions would signify acceptance of the fact that the lease had continued after the breach had occurred. And it would be allowing the landlord to have its cake and eat it, if it were to be allowed to rely on that same breach to forfeit the tenant’s lease.
Insurance rent
The Court of Appeal’s decision appeared to favour the tenants. But Lewison LJ explained that, in order to waive an unlawful sub-letting, the landlord must know not only about the sub-letting but also that the rent in question fell due after the sub-lease was granted.
The council had submitted its original invoice on 26 September 2019 and the invoice became due for payment on 2 October. But it was unclear exactly when the subletting occurred. The tenants could have sub-let the café on, say, 5 or 6 October. And the council knew nothing at all about the breach until 18 October 2019. Consequently, the insurance demand on 26 September did not affect the council’s ability to forfeit its tenants’ lease.
The council submitted a revised invoice on 4 November, requiring immediate payment. This was inconsistent with the contractual machinery for insurance rent demands – which enabled the court to conclude that the revised invoice indicated that the council was prepared to accept payment for part of the period covered by the September invoice, and was not a fresh demand for payment that waived the breach of covenant.
The sum demanded was paid to and accepted by the council on 11 November. But, since it was a part-payment of the sum that fell due on 2 October and the council did not know when the breach had occurred (except that it took place on or before 18 October), the court felt able to conclude that the council had not knowingly accepted rent falling due after (paragraph 43 of the judgment originally used the word “before”, but has subsequently been amended) the unlawful subletting.
Allyson Colby is a property law consultant
