A clause in an option agreement permitting a grantor to terminate it on the grantee’s default of obligations in a related lease was a forfeiture provision in respect of which relief from forfeiture could be granted, the court has decided in Hush Brasseries Limited v Rlukref Nominees (UK) One limited and another [2022] EWHC 3018 (Ch).
The claimant was a tenant under a lease of premises in Mayfair granted for a term of 25 years expiring in July 2024, from which it ran a restaurant and hospitality business. In March 2011 the claimant was granted a “call” option, exercisable in the last year of the term, by which it had the right to call for a new lease of the premises for a term to December 2030. The landlord had a similar “put” option. The option provided that the landlord could determine the agreement if the tenant was in breach of any of its provisions or on the occurrence of any of the events which entitled the landlord to forfeit the lease.
During 2020 and 2021 the claimant fell into arrears of rent under the lease and in July 2021 the defendants served notice to terminate the option on the ground of rent arrears, which it was agreed was effective. They did not seek to forfeit the lease. Following negotiations, it was agreed that a proportion of the arrears would be waived and the remainder would be paid on various dates. The claimant duly paid the arrears. Was the claimant entitled to relief from forfeiture of the option?
In order to exercise its discretion as to whether to grant relief from forfeiture, the court needed to be satisfied that the option contained a sufficient proprietary interest in the property and that the determination clause secured the performance of the tenant covenants in the lease, in particular the obligation to pay rent.
The court concluded that immediately before the option was terminated by notice the claimant had a sufficient proprietary interest in the property: the option was noted against the registered freehold title to the property under section 32 of the Land Registration Act 2002. Where a proprietary interest is granted subject to revocation or determination on breach the clause providing for determination is a forfeiture Cavendish Square Holding BV v Makdessi [2016] AC 1172.
When the option was granted the parties to it were landlord and tenant under the lease: their intention was that both lease and option would go hand-in-hand in practice. Both the forfeiture clause in the lease and the determination clause in the option were intended to secure the tenant’s performance of its covenants under the lease. Had the defendants forfeited the lease rather than the option, it was very likely that the claimant would have been granted relief from forfeiture, since in the eyes of equity the proviso for re-entry is a security for the rent. The function of the court is to grant relief when all rent and costs have been paid Woodfall on Landlord and Tenant 17.181. It would be unconscionable for the defendants to retain the benefit of their termination of the option.
Louise Clark is a property law consultant and mediator
