With many commercial tenants feeling the impact of increased costs, pressure on rental payments is on the rise.

During the pandemic, the landlord's right to forfeit (terminate) the lease was restricted, giving much-needed protection to tenants.

However, that protection was lifted in March 2022, and forfeiture is once again an option for landlords and is frequently being utilised despite the potential difficulties they may face in re-letting the property.

When faced with financial pressures, many tenants may look to assign or sub-let the lease as a way of mitigating their liability for the lease provisions.

In this blog, we review the basics of forfeiture and then look at the status of a sub-tenant where the landlord takes action to forfeit the headlease.

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What is forfeiture, and when is it available to the landlord?

Forfeiture is the right of the landlord to re-enter the property and take back possession.

There must be an express right to forfeit in the lease, which usually specifies the grounds for forfeiture.

These may include:

  • Non-payment of rent;
  • Insolvency of the tenant/guarantor;
  • A breach of one of the other clauses of the lease (such as the repair or alienation clauses).

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How can a landlord forfeit?

Landlords can forfeit by using peaceable re-entry (changing the locks) or by issuing court proceedings for a forfeiture order.

Peaceable re-entry can only be used where the breach is non-payment of rent.

For all other breaches, the landlord must first serve a notice under s.146 of the Landlord and Tenant Act 1925 requiring the tenant to remedy the breach "if it is capable of remedy".

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What is the position of the sub-tenant following forfeiture?

If the headlease is forfeited, this automatically ends any sub-lease.

Clearly, this is unfair to sub-tenants, who stand to lose their interest through no fault of their own.

However, sub-tenants in this position can make use of s.146(4) of the Landlord and Tenant Act 1925, which allows them to make an "application for relief" against forfeiture of the headlease, even where the tenant does not make such an application.

The application for relief can be made as part of the landlord's action against the head tenant or via the sub-tenants own proceedings.

Sub-tenants should make an application for relief within six months of the landlord taking possession.

It is important to understand that the parties cannot agree to relief without the court's consent.

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Is the granting of relief subject to conditions?

The granting of relief is at the court's discretion, and the court may impose conditions such as requiring the sub-tenant to comply with the terms of the headlease.

The sub-tenant should be aware that if it is a sub-tenant of part, the court may require it to take a new lease of all of the property comprised in the headlease or pay the arrears of rent relating to the whole as a condition of granting relief.

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What happens if the application for relief is successful?

If successful, the court could apply the following forms of relief:

  1. The grant of a new lease to the sub-tenant on terms that the court sees fit (though not for a term longer than the original term of the sub-lease); or
  2. The vesting of the tenant's lease in the sub-tenant.

In either scenario, the sub-tenant will become the immediate tenant of the landlord.

However, with the second form of relief, any other sub-interests that the subtenant has created will not be reinstated and will fall away, and the subtenant will be liable to the landlord for mesne profits for the period between the forfeiture of the lease and the grant of relief.

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Take away points for forfeiture

  • Landlords should consider applications to sub-let carefully, as if they ultimately decide to forfeit the headlease, the sub-tenant could become their direct tenant.
  • Similarly, landlords should review their portfolios regularly and ensure tenants are not sub-letting without the landlord's consent.
  • If a sub-tenant finds itself in a position where the headlease has been forfeited, they should be comfortable taking on a lease of the whole before making an application for relief.

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If you need expert legal advice concerning forfeiture of lease for commercial sub-tenants, please contact Myerson Solicitors' Property Litigation team on: