Landlords - what should you be aware of when considering the forfeiture of a commercial lease?
Friday, 16th December 2016
Forfeiture is a process by which a landlord can end a lease early if the tenant is in breach of any of its obligations or if certain events have occurred. If the right to forfeit the lease is exercised by the landlord, the landlord can recover possession of the property. It is important to note that there should be a right to forfeit set out in the lease itself – ideally this right will be expressly set out, together with the circumstances in which the landlord can forfeit. These circumstances will usually be late payment of rent, a breach of covenant and/or the tenant becomes insolvent. A right of forfeiture can be implied but this will depend on the circumstances of each individual case.
Forfeiture is a final act that a landlord cannot retract. The landlord can either re-enter the property peacefully or commence court proceedings. It is crucial that the landlord demonstrates its intention to forfeit and notifies its intention to forfeit to a tenant.
A landlord should always consider whether exercising a right to forfeiture is the correct step to take.
Is there a commercial advantage if the right to forfeit is exercised? If not, regaining possession of the property may not be the best solution. A range of factors require consideration including the current market conditions and whether the property can be re-let quickly.
For commercial premises, a section 146 notice must be served on the tenant for the right of forfeiture to be exercised. However, it is important to note that the process of forfeiting the lease for non-payment of rent is slightly different; the landlord must first demand the rent and service of a section 146 notice is not a pre-requisite for forfeiture.
Where the right to forfeit is being exercised due to a breach of covenant by the tenant, the section 146 notice must notify the tenant of the breach and provide the tenant with a reasonable time to remedy it; if the breach is capable of being remedied. If a landlord does not provide the tenant with this ‘reasonable period of time’ for remedy, there is a risk that the section 146 notice will be deemed invalid.
It is important that a landlord considers the tenant's rights under the Leasehold Property (Repairs) Act 1938 if considering serving a section 146 notice for breach of a repairing covenant. If a lease is granted for a term of at least seven years and there are at least three years left to run, this legislation limits the landlord's ability to exercise the right to forfeit. A notice must be served on the tenant at least one month before bringing the action to forfeit the lease. The tenant can serve a counter notice, although there is a time limit of 28 days in which they must do so. If the tenant does serve a counter notice, the landlord cannot proceed to forfeit the lease without the court's consent.
A landlord should be careful not to waive the right to forfeit. If the landlord indicates or does anything that suggests that the lease is ongoing, there is a risk that the right to forfeit the lease will be lost. By way of example, if a landlord accepts rent after the right to forfeit has arisen there is a risk that this can amount to a waiver. Landlords should be aware that, if action is taken which indicates an intention on the part of the landlord that the lease is to continue, they may inadvertently waive the right to forfeit.
Whether the landlord knows of a breach of the lease will be an ‘objective test’. This is a test of whether the ‘reasonable man’ would say that the landlord knew of the breach but continued to accept rent. The landlord’s actual intentions are not taken into account.
If a breach continues, for example, the tenant continues to use the property for a purpose that is not permitted by the lease, this gives the landlord a new right to forfeit accruing on each day that the breach continues. In such a circumstance, it may not be necessary for the landlord to serve a new section 146 notice where a breach is continuing and the landlord could be deemed to have waived its rights previously.
A tenant always has the right to apply for relief from forfeiture through the court. The tenant can submit an application to the court as soon as the landlord begins the forfeiture process. The courts have discretion as to whether to grant relief and, if the court does grant relief, conditions will usually be imposed requiring the tenant to remedy the breach. The court could require the tenant to pay the outstanding rent within a certain time frame or carry out repairs.
Finally, it is important to highlight that there are other possible remedies for a breach of the lease. This includes the landlord and tenant agreeing to surrender the lease, exercising rights to recover arrears of rent through guarantors, or using the rights that a landlord may have under the lease to enter the property to rectify and/or repair any breach by the tenant.
The decision to forfeit a lease should only be taken after careful consideration and with specialist legal advice.
This article explains some legal concepts under English Law in general terms and is not a substitute for taking professional legal advice for your specific circumstances. If you would like further advice regarding any of the points set out above, please contact us.