05/11 Don't forfeit your rights


Real estate briefing note email

If you're a landlord, understanding your options when a tenant defaults on their payments or breaches a tenant covenant can be difficult. Equally, if you're a tenant, a sub-tenant or a mortgagee of a lease threatened with forfeiture you will probably need some advice about how to proceed.

We frequently advise parties in relation to forfeiture and this note explains the basics – what is forfeiture, what considerations and options should be taken into account, how leases are forfeited, what relief is available to whom and when. This area of law is widely regarded as complex, arcane and ripe for reform, yet despite debate over the last few decades the Government currently has no plans to make any changes.

 

What is forfeiture?

Forfeiture is the landlord's right to re-enter the premises and end the lease on a breach of any of the tenant's covenants or when certain events specified in the lease occur. The landlord's right to forfeit is not automatic and exists only where the lease expressly includes the right. We would expect all commercial leases to include such a right and for landlords to be able to recover any costs associated with enforcing covenants and re-entering the premises.

Before forfeiting a lease the landlord should carefully consider the following:

  • Forfeiture enables a landlord to obtain possession of the premises, put the premises into repair and obtain damages for breach of the tenant's covenant to yield up the premises in repair. In a rising market a landlord should be able to re-let the premises relatively easily and possibly at a higher rent.
  • In a falling or stagnant market, a landlord may end up with empty premises incurring running costs including business rates, a loss of income and, possibly, a detrimental effect on other adjoining or adjacent premises of the landlord. The commercial effect of seeking forfeiture must be carefully considered.
  • A landlord should also consider that if the tenant applies for relief, the landlord will be unable to enforce the repairing and other covenants until the tenant's application has been decided. This can have estate management consequences.
  • When a landlord forfeits a lease, the lease and any sub-leases will immediately end and it is not possible to 'revive' the lease(s) even if the landlord wishes to allow the tenant back into the premises. A new lease would need to be entered into.
  • The process of forfeiting a lease will invariably incur other costs – adviser's fees, landlord/landlord's agent management time and agent's fees for re-letting the premises.
  • If the tenant is affected by one of the insolvency regimes then the landlord may need the permission of the court to forfeit the lease and may not be able to recover any costs or damages.
  • Using the threat of forfeiture against the tenant can be a strong negotiating tool (unless, of course, the tenant in fact wants the lease to come to an end, possibly as a result of financial problems).

 

Alternatives to forfeiture

  • Demanding rent directly from any sub-tenants.
  • If there is a guarantor/former tenant – claiming against them or, if the lease was granted before 1 January 1996, claiming the rent against the original tenant. In either case, you will need to serve a notice within 6 months of the current tenant's default.
  • Commencing bankruptcy, or winding up proceedings against the tenant – however this will be at the landlords' cost.
  • Distress – entering the premises and seizing chattels to the value of the debt. Always take advice before proceeding.
  • Consider other options with the tenant, for example offering to enter into a side letter allowing the tenant to pay rent monthly for a limited period.
  • Seek an injunction or damages where there has been a breach of other tenant covenants.

 

I am a landlord. How can I forfeit a lease?

Assuming your lease contains a right to enter, you may forfeit the lease if the tenant is in breach unless you have waived the right to forfeit.

Please refer to the flowchart below for a simplified indication of the procedure (certain situations require additional steps) and note the following:

  • A landlord can expressly or impliedly waive the right to forfeit where the landlord does some unequivocal act which recognises the continuing existence of the lease.
  • Examples of waiver include demanding or accepting payment of rent after the right to forfeit has arisen (notwithstanding any administrative errors by the landlord or the landlord's agents and including receipt of rent paid under a standing order or the rent is demanded or received "without prejudice to the landlord's right to forfeit").
  • Remember that where a landlord waives a one-off breach, for example a breach against a particular sub-letting, the landlord's right to forfeit on the basis of that particular breach will be lost forever.
  • Where a landlord waives a right to forfeit in respect of a continuing breach, for example accepting rent notwithstanding that the premises is in disrepair where the tenant has breached a repair covenant, the right will arise again if the premises continues to be in disrepair.
  • It is not always clear whether a breach is one-off or continuing or whether a particular act by a landlord or a landlord's agent will constitute a waiver. It is always safer (and usually cheaper in the long run) to seek early advice before acting.

I am a landlord. How can I forfeit a lease?

Download our flowchart for a simplified indication of the procedure.

 

What to do if you are a tenant who is at risk from or is facing forfeiture proceedings

1 Do not put yourself in a position where you will be in breach – pay the rent as set out in the lease, apply for the landlord's consent as required and comply with any reasonable and correctly served notices from the landlord. If you know in advance that you will not be able to comply with any of the tenant covenants in the lease do not accept them in the lease negotiations. If you have already entered into the lease consider approaching your landlord for a concession to pay rent on a monthly basis.
2 Remember – tenant covenants are not just found in leases: they may also be found in any documents ancillary or supplemental to the lease including any licences, documents containing the landlord's consent, side letters, service level agreements or even on the tenant or landlord leasehold/freehold titles (remember to check these if you accept a provision in your lease to comply with superior interests).
3 If your lease is threatened with forfeiture you may be entitled to relief which, if granted, would allow you to continue occupying the premises and keep your lease. You will have to apply to court for relief which is at the discretion of the court. Act quickly, pay any arrears, remedy any breaches of covenant and pay the landlord's costs. If the landlord applies for a court order for possession you can seek relief at any time until re-entry. If the landlord peaceably re-entered without a court order, you will generally need to apply to the court within 6 months of the date of re-entry.
 

What to do if you are a sub-tenant or mortgagee and a superior interest is forfeited

1 Remember if a superior interest is forfeited any inferior interests will automatically come to an end.
2 You may be entitled to relief even if the head-tenant (or your landlord) is not. Any relief is at the discretion of the courts and you will not be granted a term longer than that remaining under your sub-lease. If your sub-lease is of part of larger premises, you may, as a condition of relief, have to take a new lease of whole or pay arrears relating to the whole.
3 Be aware that any other sub-interests you, the sub-tenant, have created will not be reinstated and you will also be liable to the landlord for mesne profits for the period between the forfeiture of the lease and the grant of relief.
4 Mortgagees are sub-tenants for the purposes of taking such relief.