Q&A: Getting to the heart of forfeiture

Lauren Spark and Richard Clarke tackle queries about forfeiture of commercial leases.

Question

The tenant of my commercial unit has missed the last quarter’s rent payment. What rights do I have to forfeit their lease?

Answer

Assuming there is a forfeiture clause, you will be able to forfeit the tenant’s lease for non-payment of rent by peaceable re-entry or court proceedings but careful attention must be paid to the specific terms of the forfeiture clause.

Explanation

The power to forfeit a lease for a breach of covenant is a form of security to ensure compliance with covenants. The landlord’s right to forfeit, if any, is determined by the terms of the particular lease. If there is no forfeiture clause (which is rare) the landlord has no right to forfeit and must pursue an alternative remedy, such as a court claim, for the arrears.

Provided that there is a forfeiture clause in the lease, the precise terms must be considered carefully, particularly any preconditions or other requirements that are imposed. It is important to note that a short grace period is often given. For example, in Bhat and another v Patel [2021] EWHC 2960 (Ch); [2021] EGLR 48, the landlord’s claim was for possession of a medical centre, together with arrears of rent. The lease provided that if the tenant was in default of rent then “at the option of the Landlord, [the lease] may be terminated upon 30 days’ notice”.

The judge noted that this clause was a “non-standard” form of forfeiture clause and upheld the judgment below that the service of the claim form by the landlord amounted to notice required under clause 21. He explained that the effect of the words used by clause 21 were that, once notice had been given, the forfeiture would not “take effect until 30 days have expired”. This meant “if the arrears due were paid before the expiry of the 30 days, there would be no effective forfeiture”.

Depending on the wording used, a lease can also require that notice of arrears be given to a tenant before the landlord’s contractual right to elect to forfeit the lease can be exercised. For example, under the lease in Bhat, 10 days’ prior notice was required of sums that were not due on a specific date.

Such notice was a pre-condition of the right to elect to forfeit, and so was required “before the landlord had the option to terminate the lease”. A re-entry/forfeiture claim undertaken without complying with such a pre-condition would be void.

Therefore, depending on the precise wording of the lease and in particular, the forfeiture clause, it is likely that you will be able to forfeit your tenant’s lease due to non-payment of rent.

Question

If my lease is forfeited by County Court proceedings, am I likely to be able to regain occupation of the unit? Does the court have a discretion or will I be able to go back into the property if I pay the outstanding rent?

Answer

Yes, provided that you apply for relief from forfeiture and pay the rent arrears and costs at least five clear days before the first possession hearing, you will obtain automatic relief from forfeiture.

Explanation

If a landlord forfeits a commercial lease of premises for non-payment of rent, the tenant has the right to apply to court for relief from forfeiture. From the landlord’s perspective, the forfeiture brings the lease to an end and only the court has the ability to “resurrect” the lease. If the parties only agree to relief from forfeiture without obtaining a court order, the original lease will not be reinstated and a new tenancy is created.

In Bhat, Smruti Patel forfeited Vikram and Geetha Bhat’s lease of 105 Calcutta Road for non-payment of rent by court proceedings. The Bhats applied for relief from forfeiture and at first instance, the judge refused the Bhats’ application.

On the Bhats’ appeal to the High Court, the judge stated that the first instance judge had not been referred to section 138 of the County Courts Act 1984. Pursuant to section 138(2) of that Act, if a tenant pays into court or to the landlord not less than five clear days before the day set for the first possession hearing when proceedings are issued all of the rent in arrears and the costs of the action, the action shall cease, and the tenant shall hold the land according to the original lease. Pursuant to section 138(3), if the action does not cease under section 138(2), the court “shall order” possession of the land at the expiration of a period of not less than four weeks, unless within that period the tenant pays the rent in arrears and the costs of the action.

The judge therefore held that the first instance judge was wrong to treat himself as having a broad discretion about the matter as section 138(3) applied. The Bhats were entitled to an order giving them relief against forfeiture on payment of the arrears and the costs of the forfeiture proceedings within a period no shorter than four weeks, regardless of evidence of ability to pay the arrears.

The only discretion available to the court in these circumstances is the length of time within which the tenant must settle the arrears, interest and costs. However, if you pay the rent arrears and landlord’s costs at least five clear days before the first possession hearing, you will be granted automatic relief from forfeiture.

Lauren Spark is an associate in the real estate disputes team at Charles Russell Speechlys LLP and Richard Clarke is a barrister at Landmark Chambers.

An original version of this article was first published on Estates Gazette.