Forfeiture allows a landlord to bring a lease to an end where a tenant is in breach of any of its lease obligations or on the occurrence of certain events specified in the lease, for example where a tenant enters an insolvency process.
Forfeiture can be brought about either by a landlord peaceably re-entering the property or by commencing possession proceedings at the court.
If you are a landlord, there are some practical questions to ask before deciding whether to forfeit a lease. These mostly revolve around whether it is commercially sensible to take back possession of the property.
In a depressed economic climate, there may be no benefit in taking back the property. The following are questions you might want to consider before deciding whether to forfeit:
1. In the current market, will a new tenant be found quickly following forfeiture?
2. Could a new tenant be found who could rent the property at a higher rent? This is likely only to occur in a strong market.
3. If a new tenant cannot be found straightaway, what outgoings will be you be responsible for?
4. Are there any other original tenants or guarantors under the lease who would be released upon forfeiture?
5. Is there a guarantor who has to take a new lease following forfeiture? Do you want this guarantor as your new tenant?
6. Would forfeiture allow you the opportunity to redevelop the property?
7. Would there be a risk of squatters taking up occupation in the empty property?
There may be other remedies available to you instead of forfeiting the lease. Our specialist property litigation solicitors will be able to talk you through these options.
Can you forfeit your lease?
A landlord’s right to forfeit must be expressly stated in the lease. If there is no specific right to forfeit, then as a landlord you only have an implied right to forfeit if your tenant breaches a condition of the lease e.g. does not pay rent.
As a landlord, you must make sure you comply with various statutory and common law rules before exercising your right to forfeit. It is important to consider whether you have waived your right to forfeit or whether the tenant may have a right to relief from forfeiture.
Furthermore, if the property is rented as a residential property or as a mixed space (i.e. commercial and residential), the right to forfeit or peaceably re-enter the property is not available without an order from the court. To restrict a person from lawfully entering a property in these circumstances is a criminal offence under section 2 of the Protection from Eviction Act 1977 and could leave you liable to a fine or even imprisonment.
There are also statutory limitations on a landlord’s right to forfeit a long residential lease due to a tenant’s breach of covenant. Many of these limitations are contained in the Commonhold and Leasehold Reform Act 2002 and severely restrict a landlord’s right to forfeit a long leasehold lease.
Finally, if your tenant falls into an insolvency situation, you may not be able to forfeit the lease without consent or permission from the court. The solicitors in our property litigation team have extensive experience in dealing with insolvent tenants and can advise as to your options.
Section 146 Notices
As a landlord, generally speaking you cannot forfeit a lease for breach of covenant until you have served a section 146 notice under the Law of Property Act 1925. A section 146 notice gives your tenant a reasonable time to remedy the breach, if the breach is capable of being remedied. The most common example of when a section 146 notice does not need to be served is when a tenant does not pay its rent.
Breaches of the lease
These can be categorised as “continuing” or “once and for all” breaches.
Where the breach is a continuing breach, a fresh right of forfeiture will accrue each day the breach continues. Examples of continuing breaches include:
- Breach of covenant to keep the property in repair.
- Breach of a user covenant.
Breach of a covenant to insure the property.
Where there is a “once and for all” breach, the right to forfeit for that breach will be lost upon waiver. Generally speaking, if there is an obligation upon your tenant to do something by a specified date or within a reasonable period of time, then if your tenant does not perform that act, it will be a once and for all breach. Examples of once and for all breaches include:
- Not carrying out repairs by a specified date.
- Not paying rent.
- Assigning or subletting the lease (when this is not allowed under the terms of the lease).
- Making alterations to the property (when this is not allowed under the lease).
Where the right to forfeit has arisen and you are considering forfeiting the lease, as a landlord you must ensure that you do not do anything which may waive your right to forfeit. Waiver will occur when:
- You have knowledge of your tenant’s breach.
- You perform an unambiguous act which recognises the lease as continuing to exist and communicate that act to your tenant.
As soon as you become aware of the breach, you must either elect to forfeit the lease or treat it as continuing. The most common way of treating the lease as existing is demanding or accepting rent from your tenant although this may not always mean you lose your right to forfeit.
As a landlord you also need to make sure that you do not conduct yourself in other ways which could treat the lease as continuing to exist. In that situation, the court would need to consider all of the circumstances and decide whether your actions were so clear that they could only be consistent with continuing to treat the lease as existing.
Procedure for Forfeiture
Forfeiture is a final and positive act which as a landlord you cannot withdraw from. Any action taken to forfeit must be clear and demonstrate your intention to forfeit the lease. As a landlord you must also communicate the act of forfeiture to your tenant.
Forfeiture can be carried out either by peaceably re-entering the property or by issuing and serving possession/forfeiture proceedings at the court.
If you peaceably re-enter the property, the lease will be terminated subject to any claim for relief from your tenant or any third party with an interest in the tenancy. Therefore, before deciding whether to peaceably re-enter the property, the following issues need to be considered:
- When the right to peaceably re-enter arises. As landlord, you should ensure the right to forfeit has arisen before re-entering the property. There is usually a period of time between the breach occurring and your right to forfeit arising. For example, for non-payment of rent, you must generally wait for the expiry of a specified period of time (usually no more than 21 days) before attempting to re-enter the property.
- Is a section 146 notice necessary allowing your tenant to remedy the breach?
If a lease is forfeited before the right to forfeit actually arises then your tenant may be able to bring a claim for wrongful forfeiture. This involves an application to the court for all of the following remedies:
- A declaration that the forfeiture was wrong.
- An injunction allowing the tenant to regain possession of the property.
- A damages claim for the losses suffered by the tenant whilst it was not allowed in the property.
Usually as well, the tenant will be able to claim for relief from forfeiture in case its claim for wrongful forfeiture is unsuccessful (please see relief from forfeiture below).
How to Exercise Peaceable Re-entry
There must be physical re-entry and this is usually done by changing the locks or stringing up a chain to prevent access to open land.
The key here is that the property is re-entered peaceably. A criminal offence will be committed if any violence or excessive force is used to gain entry and there is somebody physically at the property who opposes the right of re-entry. Practically, this means that re-entry carried out at commercial properties is carried outside of working hours to ensure that there is nobody at the property. Our Property Litigation team have excellent relationships with certified bailiffs who can peaceably re-enter properties, often in the early hours of the morning or late at night.
Once the property has been re-entered, a notice needs to be placed at the property stating that re-entry and forfeiture has taken place. Our expert property litigation solicitors can help you draft this notice and provide advice as to where it should be placed. Also, if your tenant has its belongings inside the property, arrangements will need to be made to try and return these.
Court Proceedings for Forfeiture
If you decide to issue court proceedings for forfeiture, the lease will determine when your tenant is served with those proceedings. However, the lease will only terminate once the court makes an order for possession. The time in between service of proceedings and the court making a possession order is known as the “twilight period”.
Our expert property litigation solicitors regularly deal with court possession proceedings and can guide you through the process from the issue of the proceedings right through to the final hearing where the court will make a decision as to who is entitled to possession of the property.
Undertenants and Mortgagees
Forfeiting a lease will also bring to an end any interests that derive from the forfeited lease. This includes the interests of any undertenants or mortgagees. If you wish to forfeit the lease but grant a new tenancy to a third party, you should inform any party who may be affected by this.
Tenants’ Relief from Forfeiture
This is a discretionary remedy available to any tenant or third party with an interest in the lease after a landlord has exercised its right to forfeit. An application for relief can be made:
- In a counterclaim or defence to court proceedings brought for forfeiture; or
- In separate court proceedings.
When deciding whether to grant relief, the court will look to put both the landlord and the tenant back into the positions they would have been in had forfeiture not taken place. If relief is granted to a tenant, the lease will be restored as if forfeiture had never taken place. Any further interests, such as an underlease, will also be restored.
Only the court can grant relief. Landlords and tenants cannot agree to grant relief without the consent of the court.
If as a landlord you grant a new lease to a third party after forfeiture and the court subsequently grants relief to the original tenant, the third party’s lease will become an intermediate lease between the original lease and the landlord. This could give the third party the right to claim damages from you.
Generally speaking, the court will grant relief if both of the following conditions are met:
- The tenant remedies the breach or pays compensation in respect of breaches that cannot be remedied; and
- The court is satisfied that the tenant will perform its lease obligations in the future.
When deciding whether to grant relief, the court will take into account the tenant’s conduct, the nature and seriousness of the breach and its relationship to the value of the property. If the tenant’s breach was wilful or deliberate, it is unlikely the court will grant relief. Also, where the breach is something the tenant did without your permission, the court will look at whether you could have reasonably refused consent. Another important factor is whether a new lease has been granted to a third party and whether there has been any delay in the original tenant applying for relief. This is not an exhaustive list of factors the court will consider. Our property litigation team can advise fully on what circumstances and factors the court may take into account.
If the court is minded to grant relief, it may only do this upon certain conditions being satisfied. This may include the following:
- The tenant paying you costs, expenses, damages or compensation.
- Granting an injunction preventing the tenant from committing the same or similar breach in the future.
- The tenant paying your costs of the forfeiture proceedings save for any costs incurred by the landlord in opposing the application for relief.
Please note however that the court cannot force the tenant to comply with the above conditions. If the tenant does not comply with any conditions laid down by the court, it simply will not obtain relief from forfeiture.
Time limits apply for how long a tenant has to apply for relief from forfeiture. Where forfeiture is by way of court proceedings, the tenant can apply for relief at any time until the possession order is enforced. Where forfeiture takes place by peaceable re-entry, the tenant can apply for relief at any time provided it is still reasonable to grant relief.
A tenant’s right to apply for relief from forfeiture due to non-payment of rent derives from statute and also from the court’s equitable jurisdiction.
When possession/forfeiture proceedings are issued in the County Court, a tenant’s right to obtain automatic relief from forfeiture operates as follows:
- The tenant must pay all arrears, interest and costs into court not less than 5 days before the first hearing of the proceedings.
- On payment of all arrears, interest and costs, the landlord’s claim ends and the lease is reinstated with retrospective effect.
If the above does not happen and at the first court hearing the court finds that you are entitled to enforce the right of re-entry then the court will normally order possession at a future date, usually 4 weeks after the hearing takes place. This will give the tenant a further chance to obtain relief from forfeiture if it pays all arrears, interest and costs into court before the date for possession arises.
If the tenant doesn’t take up this second opportunity for relief, then the tenant does have a further right to apply for relief within 6 months of you recovering possession. In this situation, the court will normally grant relief if the tenant pays all arrears, interest and costs and it is satisfied the tenant will comply with its lease obligations in the future.
Where forfeiture for non-payment of rent takes place via peaceable re-entry, the tenant may apply for relief to the County Court within 6 months of re-entry. On such an application being made, the court may grant relief to the tenant as it sees fit.
It is rare for forfeiture proceedings to be dealt with by the High Court or that the High Court should grant relief. Nevertheless, the following will apply. Where forfeiture for non-payment of rent is by way of court proceedings, the court does have the power to grant relief provided the tenant pays the rent arrears and the costs of recovering the arrears. If there is at least 6 months’ rent in arrears and the tenant pays all of the arrears and costs before the trial of the possession proceedings, the court proceedings are automatically discontinued and the tenant retains the property without the need for a new lease. Normally, where at least 6 months’ rent is outstanding, the tenant only has 6 months after execution of the possession order to grant relief. However to grant relief again the tenant will have to pay all of the rent arrears and costs incurred in pursuing the rent arrears. The court can however still refuse to grant relief during this 6 month period if it would be unfair to grant relief. Landlords should also note that the 6 month time limit for apply for relief is not a strict time limit and is taken only as a guide. A tenant may therefore be granted relief if it applies after 6 months.
Where the lease is forfeited by peaceable re-entry, the High Court has the power to grant relief but again provided the tenant pays the rent arrears in full together with the costs of recovering the arrears. Again, the 6 month rule mentioned in the paragraph above will be taken into account by the court.
Relief From Forfeiture for Undertenants and Mortgagees
The Law of Property Act 1925 allows undertenants, mortgagees and any other person with an interest in the property to apply to court for relief. This is irrespective of the grounds the landlord relies upon when forfeiting.
Where relief is granted by the court, a new lease will be granted. This new lease will have no retrospective effect and will be on terms decided by the court. It should be however noted that an undertenant will not be entitled to a lease on a longer term than that of the original underlease. Furthermore, any lesser interests the undertenant has created will not be reinstated and will fall away. An undertenant will be liable to the landlord for mesne profits for the period between the forfeiture of the lease and the grant of relief.
An undertenant or mortgagee can make an application for relief either in the landlord’s own action against the original tenant or in its own court proceedings. The court has a wide discretion to grant or refuse relief however given that granting relief will create a contract between the landlord and the undertenant, the court will use its discretion sparingly if the landlord does not find the undertenant acceptable.
The factors which the court will consider when deciding to grant relief to an undertenant or mortgagee are the same as those which apply where a tenant is making the application. However there are also additional factors which the courts have taken into account in the past. These include whether:
- The undertenant will enjoy security of tenure when its lease expires.
- The undertenant is in breach of the covenants contained in the underlease.
- The underlet property can be conveniently occupied under a lease which is separate from that of the remainder of the property comprised in the head lease.
- The landlord will suffer hardship if the court grants relief (although this will be balance with the hardship caused to the undertenant if relief is not granted).
- The undertenant is content to take on the head lease obligations, which could be more onerous than those contained in the underlease.
The court has absolute discretion over the terms and conditions on which it grants relief to an undertenant or mortgagee. The terms and conditions will be those which the court thinks are fit given the circumstances of the case. This is only subject to the requirement that the new lease cannot be for a longer term than that granted by the original underlease. In practice, the court will usually order the grant of a new lease on the same terms as the forfeited head lease. Conditions and terms the court can impose include the following:
- Payment of rent, costs or damages.
- To make good any breaches of covenant contained in the head lease including any rent arrears owing to the landlord.
- Provision of a guarantor.
- Compliance with any other term the court thinks fit to impose.
If the terms imposed by the court are too onerous, the undertenant or mortgagee is not obliged to take up the new lease.
An undertenant or mortgagee can also claim relief from forfeiture for non-payment of rent under statute. Relief is normally granted by the County Court. Only in exceptional circumstances will an undertenant or mortgagee be able to apply to the High Court for relief.
Where an undertenant or mortgagee makes an application for relief, one of the factors the court will take into account is whether a new lease has been granted to a separate third party. The court will balance a landlord’s entitlement to deal with its own property with the undertenant or mortgagee’s right to relief. Some of the factors the court will consider are whether:
- The landlord acted quickly and unreasonably in granting a new lease. If a landlord has acted reasonably then it is unlikely relief will be granted.
- The third party knew about the forfeiture before it took the lease and was therefore aware of the risk that an application for relief could be made. If the third party was aware of this, this may help the party making the application for relief.
- The tenant, undertenant or mortgagee delayed in making the application for relief from forfeiture. A lengthy delay may count against the tenant.
Post Forfeiture Considerations
If you forfeit a lease for non-payment of rent, you can recover the whole quarter’s rent payable in advance which fell due before forfeiture. This applies even if forfeiture falls in the middle of a quarter.
Once the lease is forfeited, you will become liable for paying rates as the person entitled to possession of the property. However business rates relief is available for empty properties.
When a lease is forfeited, the general position is that a tenant is entitled to remove any of its fixtures and chattels. If any chattels are abandoned at the end of the lease, then as landlord you may become the new owner of the goods and can deal with them as you see fit. The difficulty here is establishing whether the goods have been abandoned. Our property litigation solicitors can provide advice on this and what steps can be taken to establish whether the tenant has abandoned its goods.
Finally, it is also worth bearing in mind that whilst forfeiture brings the lease to an end, claims which arose before forfeiture remain unaffected. For example, a tenant who is in breach of its repair and yielding up covenants can be pursued by way of a separate dilapidations claim.
How We Can Help
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To discuss Forfeiture of lease issues, please either use the contact form on the right, email us at firstname.lastname@example.org or call us today on +44(0)161 941 4000 to speak to a member of our team.