After years of discussion, abolition of forfeiture may finally be about to happen. Paul Barker and Mathew Ditchburn examine the proposals for a new regime that spells the end for peaceable re-entry
Reforming the law of forfeiture has been the subject of debate for decades. As long ago as 1968 and as recently as 2006, the Law Commission has proposed that the current regime should be abolished. That vision could now be getting closer to becoming reality, making peaceable re-entry a thing of the past.
The Lord Chancellor’s March 2015 report on the implementation of the Law Commission’s proposals identified their 2006 recommendations as awaiting a government decision, noting that:
“…discussions with some stakeholders have highlighted concerns about the summary termination procedure proposed by the commission. The government is considering how these concerns might be overcome and intends to reach a conclusion as soon as practicable in 2015.”
One such stakeholder was the Property Litigation Association (PLA), which last year canvassed the views of its members (who advise both landlords and tenants) in response to a request by the Ministry of Justice.
Forfeiture
In short, forfeiture enables a landlord to terminate a tenancy early on the basis that the tenant has not complied with their obligations in the lease.
Whether a landlord has such a right, and the circumstances in which he will be entitled to forfeit, depend on the wording of the lease. Forfeiture can currently take place either by the landlord issuing and serving possession proceedings or by them taking some other unequivocal action to signal that the tenancy has been brought to an end.
The latter, known as peaceable re-entry, often means changing the locks and is seen by landlords as an effective way of quickly enforcing a tenant’s covenants at minimal cost. In either case, the tenancy is brought to an end immediately.
If a tenancy is forfeited, the tenant or the holder of a derivative interest, such as a subtenant or mortgagee, may revive the tenancy by applying to court for relief from forfeiture.
A new landscape
The Law Commission has proposed two forms of statutory termination to replace forfeiture: first, a court-based termination claim (the standard procedure); and, secondly, an accelerated process to replace peaceable re-entry (the summary procedure). A landlord must decide which to use and the tenancy continues until the court makes a termination order or a summary termination takes effect.
The statutory scheme would apply to all tenancies, whether entered into before or after the scheme comes into force and whether or not they contain a forfeiture clause.
Standard termination procedure
Under the standard procedure a landlord must serve a “tenant default notice” within six months of the tenant’s default and not less than seven days before bringing a termination claim.
The notice must be served on the tenant and all derivative interest holders, specifying what needs to be done to remedy the breach and by when. Where the breach is not remedied or an agreement reached, the landlord can begin an action at court.
If the court is satisfied that the tenant default has occurred, it has the discretion to make a range of different orders, including a termination order to end the tenancy or an order requiring the tenant to remedy the breach, although there are a number of specific considerations (for example, the parties’ conduct) that must be taken into account.
Summary termination procedure
The proposed summary procedure will allow a landlord to bring a tenancy to an end without applying to court.
A landlord must first serve a “summary termination notice” on the tenant and derivative interest holders. This will end the tenancy one month from the date of service, unless the tenant or a derivative interest holder applies to court to discharge the notice.
If no application is made in that time, the landlord may take back possession, for example, by changing the locks. If an application is made for a discharge order, the tenancy will only determine if and when the application is refused, at which point the court may order possession to be given to the landlord.
A landlord will only be able to defeat a discharge application by showing that the tenant would, in standard termination proceedings, “have no realistic prospect of persuading the court not to make a termination order” (and there is no other reason why the matter should be disposed of by way of termination claim). This is a high bar. If the summary termination notice is discharged, the tenancy continues and the landlord would have to start again with the standard procedure by serving a tenant default notice.
Instead of relief from forfeiture, the tenant or a derivative interest holder would be able to apply to court for a “post-termination order” within six months after summary termination.
Peaceful ending?
While the replacement of forfeiture by court action with the standard termination procedure seems uncontroversial, the abolition of peaceable re-entry generates stronger debate.
The views of PLA members are clear: 90% said that it should not be abolished entirely. Aside from the obvious loss of a valuable right (94% said that peaceable re-entry was an effective remedy for landlords) there may be a number of possible reasons for this.
First, how will a landlord know whether the tenant has applied for a discharge order? It may take several weeks for the application to be processed by the courts and served on the landlord – part of the issue is that the new proposals take an out-of-court remedy and force it into a court system already creaking under the strain. In the meantime, the landlord is left in a state of uncertainty and unable to retake possession. Perhaps a requirement for the tenant to serve notice on the landlord that they have lodged an application at court would help.
Secondly, it is expected that summary termination will only be used where the premises have been abandoned or the tenant is impecunious with no hope of remedying the breach for which the landlord is seeking to forfeit. In other words, the scope for using the remedy, as compared with peaceable re-entry, is drastically reduced.
Thirdly, where a landlord peaceably re-enters for non-payment of rent and the tenant applies for relief, a landlord will typically allow the tenant back into occupation pending a court hearing or, failing that, the tenant could apply for an interim injunction. In practice, this means the tenant will either have to agree or be ordered by the court to pay an amount equivalent to the rent while its application for relief proceeds.
Under the proposed new regime, a tenant could apply for a discharge order whether or not they have any realistic prospect of avoiding termination. That would extend their stay in the property for perhaps many months until a discharge order is made. The risk is that unscrupulous tenants will use this as an opportunity to trade rent-free at the landlord’s expense while proceedings run their course, prolonging and exacerbating the tenant’s default, even if they have no real intention or prospect of contesting them.
The issue would become even more pronounced if the tenant then entered into an insolvency process, such as administration. In those circumstances, all unpaid rent due before the insolvency would be an unsecured debt, with the landlord standing to recover very little or perhaps nothing.
Landlords might decide that they are better off ignoring the summary termination procedure and using the standard procedure, where at least they would not have to get over the high bar of the “no realistic prospect” test and the risk of having to start again. In other words, the summary procedure could quickly become defunct in all cases except where the property has been abandoned.
Refining the regime
One way of mitigating these issues would be to require tenants to pay ongoing rent and other charges due under the lease as a condition of applying for a discharge order. That would help to prevent any abuse of the process.
It would also be consistent with the tenant’s case that there is a prospect of it avoiding termination because it is able to pay, and the fact that the new regime treats the lease as continuing up until the date of the termination order.
The fact that reform has stayed on the agenda for so long and is once again gathering momentum suggests that change is inevitable. When that will be remains to be seen. What is clear is that the loss of peaceable re-entry will be hard enough for the property industry on its own without introducing a new system that is easily prone to abuse.
If the proposed standard and summary termination regime is the way forward, then it is hoped that government uses the current review as an opportunity to refine the process to make it workable, even if it is never going to popular.
.
Paul Barker is a partner at Higgs & Sons and Mathew Ditchburn is a partner at Hogan Lovells International LLP. Both are members of the PLA’s Law Reform Committee.
