Forfeiture of Commercial 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.
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.
How Our Forfeiture of Lease Team Can Help
Forfeiture of a lease (or a right of re-entry) is a useful right that allows a landlord to take back possession of the property where a tenant has breached the terms of the lease.
If the tenant has failed to pay their rent, the landlord may be able to change the locks immediately (if they have not waived their right to do so). For breaches other than non-payment of rent, the landlord will need to give notice to the tenant and allow them a period of time to rectify the breach before further action is taken.
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.
- Reviewing the lease and advising on whether there is a right to forfeit the lease;
- Advising on whether a landlord may have waived their right to forfeit the lease;
- Drafting and serving a section 146 notice on the tenant;
- Advising a tenant on the validity of a section 146 notice that has been served on them;
- Instructing agents to peaceably re-enter the premises;
- Preparing Court proceedings on behalf of the landlord to forfeit the lease;
- responding to proceedings that have been issued to forfeit a lease on behalf of the tenant;
- Advising on wrongful forfeiture and issuing proceedings on behalf of the tenant for a declaration that the forfeiture was wrongful;
- Advising a tenant on the ability to apply for relief from forfeiture and making an application to Court to reinstate the lease; and
- Defending an application for relief from forfeiture on behalf of the landlord.
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Client Intro: Philip J Davies (Holdings) PLC
Our client is a commercial landlord and property developer.
Philip J Davies (Holdings) PLC held the reversion to a long lease of an entire building that had been rented to Carillion. Carillion had underlet part of the building to a charity.
Carillion entered liquidation and the liquidators disclaimed the head lease, leaving the undertenant in occupation but its right to occupy affected by the disclaimer.
We advised our client regarding their options, given a possible re-letting of the entire premises to a school (which was the condition upon the charity vacating).
Avoiding the situation where the charity became a periodic tenant or seeking a vesting order, our client forfeited the charity’s under lease and granted them a license to occupy, which enabled the charity time to find alternative accommodation and enabled our client to secure vacant possession which enabled the reletting of the entire building to the school.
Client Intro: Abbasi & Salek Partnership
Our clients are property developers and portfolio owners.
Our clients are the owner of a long lease of parts of the basement, ground floor and upper floor of a building known as Asia House, formerly a commercial building. Our clients converted its premises into residential units worth £1.3m and rented them out.
The rest of the building is owned by our clients’ landlord which is a Jersey based subsidiary of an international pension fund. It had also been converted into residential units which are rented to apartment owners under long leases.
The landlord forfeited our clients’ lease by issuing possession proceedings following the service of a section 146 notice, alleging breach of covenants during the conversion works. Our clients sought relief from forfeiture.
The landlord excluded our clients’ and their tenants from the common parts of the building on the basis they had forfeited the lease. Our clients secured injunctive relief prohibiting the landlord from interfering with our clients’ and their tenants’ rights under the lease.
The landlord refused to give effect to the injunction obtained with the result that our clients applied for the landlord’s assets to be sequestered and the directors of the landlord be committed to prison. The landlord capitulated at the committal hearing and were ordered to pay our clients’ costs of the injunction and committal proceedings.
The landlord discontinued its possession claim and consented to our clients’ application for relief from forfeiture and agreed to pay our clients’ costs.
Sean Hackett, a Partner in the Property Litigation team says “This matter demonstrates the depth of our technical and legal abilities in high value complex matters.”
Client Intro: Commercial Landlord
Our client is a commercial landlord.
The tenant occupied the commercial property and traded as a garden centre. The tenant had significant arrears of rent. We advised the landlord to use their right to forfeit the lease and peaceably re-enter the property and change the locks.
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Laura is a Partner and Head of our Property Litigation Team
Karen is a Senior Associate in our Property Litigation Team
Jennifer is an Associate in our Property Litigation Team
Vikki is a Solicitor in our Property Litigation Team
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