Back to Basics: Forfeiture and relief

Hannah Carter looks at forfeiture and relief in relation to commercial leases – likely to be highly topical in view of the scheduled expiry of the moratorium on forfeiture for non-payment of rent on 30 June. Lord Wilberforce’s words in Shiloh Spinners v Harding [1972] 225 EG 1913 set the scene: “…it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve against forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for the production of that result.” Forfeiture is the remedy available to a landlord to terminate a lease prior to its contractual expiry date, as a result of the tenant’s breach of covenant, condition or an act specified in the lease. The right to forfeit must be expressly reserved in the lease. Forfeiture clauses usually reserve the right to forfeit for: Non-payment of sums reserved as rent once they have become due, usually stated as 21 days after becoming due, whether or not formally demanded. Breach of covenant or condition. Act of insolvency of the tenant or guarantor. Exercising the right to forfeit Once the right to forfeit has arisen, to enforce the right, a section 146 notice must be served for any breach other than non-payment of rent. Serving a valid section 146 notice is imperative, failing which, the right to forfeit for that breach will not be enforceable. The section 146 notice should: State the breach. Require the breach to be remedied, if it is capable of remedy, within a reasonable period of time. Require compensation for the breach. If the section 146 notice relates to breach of a repairing or decorating covenant, the notice must refer to the tenant’s rights under the Leasehold Property (Repairs) Act 1938, which applies where a lease of not less than seven years has not less than three years left to run, enabling the tenant to serve a counter notice on the landlord within 28 days of receiving the section 146 notice. The landlord will then need leave of the court before it can forfeit the lease or claim damages for the breach. As well as restrictions imposed by the 1938 Act, some forms of tenant insolvency restrict the landlord’s ability to forfeit the lease and method of forfeiture. Most recently, since 26 June 2020, the Part A1 moratorium introduced by the Corporate Insolvency and Governance Act 2020, will additionally impact the landlord’s ability to forfeit the lease where the tenant is a company. The Coronavirus Act 2020 also imposes a temporary measure on the landlord’s ability to forfeit the lease for non-payment of rent during the “relevant period”. The relevant period is currently set to end on 30 June 2021. Is the breach ‘once and for all’ or ‘continuing’? The distinction between a breach that is “once and for all” and one that is “continuing” is fundamental to the issue of waiver of the right to forfeit. As a general guide: Continuing – a covenant requiring something to be done or requiring compliance at all times. Examples include to keep premises in repair, covenant to insure and user covenants. Once and for all – a covenant prohibiting an act or providing something to be done by a specified date or within a reasonable period of time. Examples include to pay the rent, to carry out repairs by a particular date, and covenants against assigning or subletting, or against alterations. Is the breach remediable or irremediable? The landlord needs to identify whether or not the breach is capable of remedy prior to serving a section 146 notice, given the need to provide a reasonable period of time within which to remedy the breach, if it is remediable. Akici v LR Butlin Ltd [2006] 1 EGLR 34 is the authority for the proposition that most breaches should be capable of remedy. It was stated, obiter, in Wickland (Holdings) Ltd v Telchadder [2014] UKSC 57; [2014] PLSCS 304 that a breach should be capable of remedy if the mischief it causes can be redressed. Waiver Once the landlord has knowledge of the breach giving rise to the right to forfeit, the right will be lost if the landlord does something (it must be a positive act communicated to the tenant) which is inconsistent with the intention to terminate the lease, as a result of the breach. Where the breach is once and for all, waiving the right to forfeit for that breach will be lost. Where the breach is continuing, the right to forfeit renews itself, so unless the landlord does something to unequivocally demonstrate that it will never forfeit for the breach, the right to forfeit for a continuing breach will not be waived. The burden is on the tenant to prove the right to forfeit for the breach has been waived. Acts amounting to waiver: n Accepting and demanding rent after knowledge of the breach. See Faiz and others v Burnley Borough Council [2021] EWCA Civ 55; [2021] PLSCS 19 for a recent decision on the demand and acceptance of rent, the date of the breach and the date of the landlord’s knowledge of the breach in the context of waiver. n Serving a notice to quit or a section 25 notice under the Landlord and Tenant Act 1954, after knowledge of the breach. Acts not amounting to waiver: n Demanding mesne profits for use and occupation. n Accepting rent payments as mesne profits for use and occupation. n Serving a section 146 notice. n Without prejudice negotiations prior to forfeiture will not amount to waiver unless the landlord acts in recognition of the continuing landlord and tenant relationship. Topically, waiver will be particularly relevant when the moratorium imposed by the 2020 Act expires, as landlords will need to ensure that the right to forfeit for non-payment of rent accrued since the Act came into force, which is preserved by section 82(2) of the Act, is not waived once the relevant period expires. Forfeiture by peaceable re-entry or court proceedings Once the right to forfeit has arisen and, in the case of a breach other than non-payment of rent, a section 146 notice has been validly served, the reasonable time within which to remedy the breach, if it is capable of remedy, has passed, and the breach has not been remedied nor compensation paid, the landlord can forfeit the lease by: Peaceable re-entry – the lease is forfeit at the point of re-entry, usually carried out by an enforcement officer outside of the tenant’s trading hours, by changing the locks and affixing a forfeiture notice to the premises. Peaceable re-entry cannot be used where there is a residential element. Court proceedings – serving the proceedings demonstrates the landlord’s intention to forfeit the lease. The lease is forfeit when the court makes a possession order. The period of time after the landlord has elected to forfeit the lease is known as the “twilight period”.  Relief from forfeiture The tenant can apply for relief from forfeiture as soon as the landlord is proceeding with the forfeiture. The application can be made as a standalone claim, or, if the landlord forfeits through court proceedings, as a counterclaim with its defence. While the landlord and tenant can agree relief from forfeiture, an application to the court must be made to grant relief and to reinstate the forfeit lease. Depending on whether the lease is forfeited through re-entry or court proceedings and whether it is forfeited for non-payment of rent or a breach other than non-payment of rent, with promptitude being pivotal, the tenant will need to comply with prescribed time limits within which to apply for or seek relief, or ensure the application is made within a period of time during which it remains equitable to grant relief. Any sublease will fall with forfeiture of the lease and the subtenant will have a right to apply for relief. Will relief be granted? The aim of relief is to put the parties into the position they would have been in had the forfeiture not occurred.  Where the lease is forfeited for non-payment of rent, through County Court proceedings, the tenant has an automatic right to relief under sections 138 and 139 the County Courts Act 1984, on fulfilment of statutory criteria. Where the lease is forfeited for non-payment of rent through peaceable re-entry, the tenant should apply for relief within six months of forfeiture. The court can then grant relief under section 139 of the 1984 Act, if it thinks fit and on terms which the High Court could have granted. The decision in Keshwala and another v Bhalsod and another [2021] EWCA Civ 492; [2021] PLSCS 71 highlights the need for a tenant to act with promptitude following a refusal to grant relief. There, despite having applied for relief in the County Court within six months of forfeiture, the tenant could not explain why it had not sought relief earlier.    Where the lease is forfeited for a breach other than non-payment of rent, the court has discretion on the terms of relief, which may include an order for the tenant to pay the landlord’s losses and an injunction to prevent a further like breach. The court will have regard to the gravity of the breach, the tenant’s conduct, the nature of the breach, and its impact on the value of the property, whether the landlord has relet the premises, delay in applying for relief, damage to the landlord, the financial position of the tenant and any windfall to the landlord. Reletting the premises Pending an application for relief being made, to ensure the court takes into account any reletting when considering a relief application, the landlord should put the former tenant on notice of the intention to relet the premises, with a request for any application for relief to be made forthwith or within a specified period of time. A lease granted to a new tenant will take effect as an intermediate lease between the original lease and the landlord, if relief to the former tenant is subsequently granted. Reform Reform of forfeiture is on the horizon as the Law Commission has recently launched a review of the draft bill drawn up in 2006 to replace the process with a statutory regime. Hannah Carter is legal director in the property litigation team at Brabners Photo by Conger Design from Pixabay