Forfeiture of Lease

Forfeiture of a lease (or a right of re-entry) is a useful right for a landlord, particularly when faced with a difficult tenant in a buoyant market. However, if used incorrectly the right to claim forfeiture has many potential pitfalls and landlords should exercise caution and seek legal advice before exercising the right to claim forfeiture under a lease.

Landlord’s right to claim Forfeiture

A lease includes tenant covenants, amongst others, to pay the sums due under the lease (such as rent, service charge and insurance), to keep the property to a certain level of repair and condition, and not to assign or sub-let the property without the landlord’s consent.

If the tenant breaches tenant covenants the landlord may wish to re-enter the property and end the lease. The lease may also allow the landlord to re-enter the property in other circumstances, such as where the tenant suffers an event of insolvency such as an administration or liquidation.

Prior to forfeiting a lease, landlords need to consider (1) whether taking back the property will be beneficial to them (2) whether there is a right to forfeit in the lease and (3) whether they have waived their right to forfeit the lease.

In a strong letting market, a landlord may be able to easily find a new tenant prepared to pay a higher rent, in which case, forfeiture is a good option for the landlord.

However, in a weak market, a landlord will be exposed to rates liabilities and insurance costs if they cannot re-let. In some circumstances, there is also a security issue, as a vacant property may be vulnerable to squatters.

If a landlord attempts to forfeit a lease, the tenant should consider (1) whether the right to forfeit exists (2) whether the landlord waived the right to forfeit and (3) whether they want to apply to Court for relief from forfeiture.

Forfeiture the process

Assuming the right to claim forfeiture exists (and has not been waived), where a landlord is looking to forfeit a commercial lease for non-payment of rent, they can simply change the locks to the property after the right to forfeit has arisen under the terms of the lease. This is known as “peaceable re-entry”. Alternatively, they can issue forfeiture proceedings in Court. Changing the locks is often a quicker and cheaper method of forfeiture, but it does have its risks.

Where a landlord wishes to forfeit a commercial lease for any other reason, the landlord must first serve a “section 146 notice” under s.146 of the Law of Property Act 1925. This must outline the breach/reason for claiming forfeiture and set out a reasonable timescale for the tenant to remedy the breach (in circumstances where the breach is capable of being remedied). On expiry of the deadline in the notice, the landlord can claim forfeiture by peaceable re-entry or by issuing forfeiture proceedings.

If a landlord has changed the locks or served a section 146 notice, then the tenant should consider (1) whether they have breached the terms of their lease and (2) whether the section 146 notice has been validly served.

Landlord waiver of lease Forfeiture

Even if the tenant has breached the terms of the lease (or suffered an event of insolvency), the landlord may have waived their right to forfeit the lease if they treat the lease as continuing after the breach of the lease has occurred (for example, by demanding or accepting rent, issuing proceedings against the tenant for the rent or utilising CRAR (the commercial rent arrears recovery process using bailiffs or certified enforcement agents) against the tenant after the landlord became aware of the breach).

It is important for the landlord to consider whether they have waived their right to forfeit a lease before any steps are taken to forfeit the lease.

Similarly, from the tenant’s perspective, if the landlord has forfeited the lease, they should seek advice as to whether they can defend the forfeiture and see if there is an argument the landlord waived their right to claim forfeiture and apply for a declaration that the forfeiture was unlawful or seek relief from forfeiture.

Wrongful Forfeiture

If a landlord attempts to forfeit the lease before the right to forfeit has arisen the tenant may bring a claim against the landlord for wrongful forfeiture.

The tenant’s remedy will be a declaration from the Court as to the wrongful forfeiture, together with a claim for damages and/or an injunction to allow the tenant back into the property.

Defending a claim from Forfeiture by claiming Court relief from Forfeiture

If a landlord has peaceably re-entered the property, served an S.146 notice or issued forfeiture Court proceedings a tenant can defend a claim for forfeiture by applying to the court for “relief from forfeiture”.

Relief from forfeiture is a discretionary equitable remedy and the court will look at whether the granting of relief will put the landlord and the tenant in the position they would have been in had there been no forfeiture. If relief is granted the lease will be reinstated as if no forfeiture has taken place.

Where the lease has been forfeited for non-payment of rent, the tenant will need to pay the outstanding rent to obtain relief from forfeiture. If forfeiture has been claimed for any other breach the tenant will need to either remedy the breach or pay compensation for breaches that cannot be remedied (to the extent that compensation is adequate) to defend against forfeiture.

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