by Keith Pearlman
A recent Court of Appeal decision, Billson v Residential Apartments Ltd [1] 18 EG 169 is the latest in a line of conflicting cases to state that a tenant of commercial property will have no right to apply to the court for relief against forfeiture where a landlord has physically re-entered the property after having served the tenant with a valid notice of a breach of covenant other than for non-payment of rent. If a landlord elects to forfeit the lease, he is in a far more advantageous position than had he applied to the court for an order for possession, in which case the tenant can apply for relief which the court will grant if equitable to do so. By the landlord avoiding the court process, the tenant is unable subsequently to make an application for relief. The court is powerless. The landlord has simply to ensure that, if physically re-entering, there is no one on the premises to oppose him and that no violence is used. Where the tenant’s lease is mortgaged, the mortgagee is also unable to make an application for relief and will have lost his security.
The recent Billson decision reaffirms principles established in a series of earlier decisions where the court has stated that they do not have the right to exercise their equitable discretion to grant relief to a tenant whose property has been physically repossessed by the landlord following a breach of covenant. The scenario will arise only in the case of commercial premises where the breach is for anything other than for non-payment of rent. Subject to the lease containing the usual re-entry clause and to the tenant having failed to comply with a valid notice served by the landlord under section 146 of the Law of Property Act 1925 giving the tenant a reasonable time in which to remedy the breach, then there is nothing to stop the landlord peaceably re-entering his premises. Once re-entry has been completed the tenant will have lost his right to apply to the court for relief against forfeiture.
In Billson, the lease prohibited the tenant from carrying out alterations without first obtaining the written consent of the landlords. The tenant sent plans to the landlords but carried on with the works and alterations before obtaining formal consent. The landlords served a section 146 notice requiring the tenant to remedy the breach within a reasonable time in so far as it was capable of remedy. Fourteen days later the landlords physically re-entered the premises at 6 am and changed the locks. By 10 am on the same day the tenant had retaken possession and subsequently completed the works. It was held that the landlords were entitled to possession despite having repossessed the premises only for some four hours. No waiver had taken place and, more important, the court had no equitable jurisdiction to grant relief to the tenant.
The reason for this judgment was the court’s interpretation of section 146(2) of the 1925 Act, which states that “Where a lessor is proceeding, by action or otherwise, to enforce such a right of re-entry or forfeiture, the lessee may, in the lessor’s action, if any, or in any action brought by himself, apply to the court for relief …”.
The tenant’s right to relief exists while the landlord “is proceeding” (Rogers v Rice [2] 2 Ch 170). When the landlord has actually taken action such as physical re-entry, he is no longer considered to be proceeding. The act of forfeiture is complete and relief is therefore no longer available.
Proceedings
Compare the above where, following non-compliance with a section 146 notice, the landlord issues proceedings for forfeiture. Irrespective of the merits of the landlord’s case, the tenant will invariably apply for relief to the court. The court has a very wide discretion in granting relief and will have regard to “… the proceedings and conduct of the parties … and to all the other circumstances … and in case of relief may grant it on such terms, if any, as to costs, expenses, damages, compensation, penalty or otherwise, including the granting of an injunction to restrain any like breach in the future, as the court in the circumstances of each case thinks fit” (section 146(2) Law of Property Act 1925).
Even in the absence of this statutory jurisdiction Billson highlights the judicial conflict which has existed over the years between the line of cases where the court has exercised its equitable jurisdiction and those such as Billson which have said that no such jurisdiction exists.
In Abbey National Building Society v Maybeech Ltd (1984) 271 EG 995 the landlord of a flat brought forfeiture proceedings against the tenant for non-payment of maintenance contributions. The landlord obtained an order for possession of the property without having notified the Abbey National, the tenant’s mortgagees, of the proceedings. The landlord opposed the Abbey National’s application for relief on the ground that judgment had been executed and that it was, therefore, too late to take advantage of section 146(4) of the 1925 Act in view of the fact that the landlord was no longer “proceeding by action or otherwise”. It was held that, despite the provisions of section 146(4), the court was able to exercise its equitable jurisdiction, thereby avoiding statute.
By contrast, on the same day as the High Court was deciding the Abbey National case, one of its decisions was being reversed in the Court of Appeal in the case of Official Custodian for Charities v Parway Estates Developments Ltd (No 2) [5] 1 EGLR 46; (1984) 274 EG 398. The Appeal Court took the view that there was no power for the court to exercise its equitable jurisdiction enabling it to grant relief and thereby supersede the terms of the statute. In this case, the plaintiff issued forfeiture proceedings in July 1982 against the defendant company, which had gone into liquidation in February 1979. The plaintiff argued that since the liquidator had failed to dispose of the lease within a year, he had lost the right to the relief afforded by section 146(9) of the 1925 Act.
The court held that, on the particular facts of this case, the previous High Court decision was wrong and that it had no power to go beyond the statute.
In the case of Smith v Metropolitan City Properties Ltd [6] 1 EGLR 52; (1986) 277 EG 753 the High Court held that the equitable jurisdiction to grant relief for a breach of covenant as between a landlord and tenant other than for non-payment of rent no longer existed, thereby declining to follow the Abbey National decision.
Sir Nicolas Browne-Wilkinson V-C, when deciding the Billson case in the Court of Appeal, made it clear that as things presently stand where peaceable re-entry has been effected one must distinguish between wilful or conscious breaches of covenant, as opposed to breaches other than for non-payment of rent, since it is only in the latter case that the tenants have a right to relief.
Nicholls LJ expressed a dissenting view, believing that the court does have an equitable jurisdiction to “entertain the tenant’s application for relief” thereby highlighting the confusion which has existed over the years and which shall probably have to be resolved by the House of Lords.
Peaceable re-entry
If a landlord is to effect peaceable re-entry, the standard re-entry clause must appear in the lease and a valid section 146 notice giving the tenant time in which to remedy the breach must be served. Notwithstanding any period of time which is stipulated in the notice and provided that a reasonable time elapses between service of the notice and action by the landlord, the landlord can then re-enter the premises. The re-entry must be peaceable. It is worth remembering, however, that this procedure does not apply to residential premises. Further, even for commercial premises, the landlord cannot contravene section 6 of the Criminal Law Act 1977 which states in subsection (1):
… any person who, without lawful authority, uses or threatens violence for the purpose of securing entry into any premises for himself or for any other person is guilty of an offence, provided that
(a) there is someone present on those premises at the time who is opposed to the entry which the violence is intended to secure; and
(b) the person using or threatening the violence knows that this is the case.
If the tenant is on the premises to oppose the landlord’s re-entry, causing the landlord to use violence against the tenant or his property, then the section will prohibit peaceable re-entry. On the other hand, if there is no one on the premises at the time of the landlord’s re-entry then there is nothing to stop the landlord from re-entering and, thereby, to forfeit the lease. In theory, this would enable the landlord to secure re-entry at times when the tenant is unlikely to be there, for example, during the night.
If the section is contravened, the landlord can be liable on summary conviction to imprisonment for a term not exceeding six months and/or a fine of £2,000.
Mortgagees
The decision as reaffirmed in Billson will be of some concern to mortgagees, who will see it as a direct challenge to their, normally unfettered, right to exercise their statutory powers of sale. Mortgagees should always notify the landlord of their interest in a lease so that, if forfeiture proceedings are subsequently commenced by the landlord against the tenant, they will be protected.
The landlord is obliged by virtue of the respective High Court and County Court rules to notify a mortgagee (and anyone else in possession of whom they are aware) of the proceedings (RSC Ord 6, r2 and CCR Ord 6, r3). Mortgagees can then take advantage of section 146(4) by applying to the court for relief in order to protect their “estate or interest in the property”.
Where, however, a landlord simply proceeds to peaceable re-entry the position that faces the tenant would appear to apply equally, albeit unfairly, to mortgagees. They are now, arguably, denied the protection of being able to apply to the court for relief under section 146(4) simply because the forfeiture has been completed by the landlord. This is, of course, difficult to reconcile with the Abbey National decision. However, the obvious inconsistencies will do little to alleviate the concern to mortgagees at the present time.
To remedy the situation mortgagees may wish to ensure that, when providing security to a tenant, a clause is inserted in the lease obliging the landlord to serve copies of all notices served upon the tenant, including section 146 notices, prior to the landlord taking any action including peaceable re-entry. Alternative suggestions such as mortgagees taking an assignment of the lease and granting some form of sublease have also been put forward. The sublease would, obviously, incorporate a reassignment clause in the event of repayment of sums due under the mortgage, although this is clearly unsatisfactory.
Conclusion
Billson reaffirms previous authority that there is nothing to prevent a landlord from instructing his solicitors to serve a section 146 notice in respect of a wilful breach of covenant by a tenant and then, after waiting a reasonable time, attempting peaceably to re-enter. Despite the present state of the property market, if he wants his premises back this certainly provides him with a quick and effective means of doing so and of avoiding the more lengthy and costly process of court proceedings.
The tenant is in a vulnerable position. As soon as a section 146 notice is received, a tenant should instruct his solicitors immediately to issue an originating application or summons for relief against forfeiture (Pakwood Transport Ltd v 15 Beauchamp Place (1977) 245 EG 309). Alternatively, the tenant should seek an undertaking from the landlord that he will not physically re-enter the premises. As a last resort, if this is not forthcoming, the tenant should consider obtaining an injunction from the court to prohibit his landlord from proceeding with re-entry.
Arguably, mortgagees are in an even worse position. They may not receive prompt (or, indeed, any) notice of intended action by the landlord. While there is nothing to stop them from requiring borrowers to provide them with details of any notices received, the obvious delay, not to mention the administrative difficulties in ensuring that the borrower takes prompt action, may be fatal.
In the meantime, however, a tenant or mortgagee must take positive action quickly to avoid both the lease and mortgagees’ security being lost.
