Forfeiture - A Guide for Commercial Landlords
Points for a landlord to consider before forfeiting a Lease
Specific advice should be sought in individual cases but, as a guide, the following factors should be borne in mind:
- Do you want to redevelop the premises?
- Is there a rent deposit?
- Is there a subtenant at the premises?
- Do you have a guarantor or any former tenants or former guarantors who are still liable?
- Are you confident that you can re-let the premises?
- Will the new rent payable by any new tenant be at least as much as the existing rent?
- Do you need to serve notice under section 146 of the Law of Property Act 1925 before you can forfeit?
Is there a right to forfeit?
- Check that the lease contains a clause allowing you to re-enter the premises in certain circumstances, e.g. where there has been a breach of the lease. (If the lease does not contain a re-entry clause, the position will need to be considered further and the prospects of forfeiture may be slim.)
- Check that the re-entry clause covers the tenant’s act you are complaining about, e.g. a tenant’s covenant not to assign the lease without consent is not broken by a subletting.
- Check whether the lease specifies any pre-conditions for exercising the right to forfeit, e.g. a grace period for paying sums due under the lease.
If: (1) there is a re-entry clause in the lease; (2) the re-entry clause covers the tenant’s act; and (3) any pre-conditions in the lease have been satisfied: you have a right to forfeit the lease.
However, for all breaches of covenant other than the non-payment of rent, you will need to give the tenant notice of your intention to forfeit the lease - under Section 146 of the Law of Property Act 1925. Where the tenant has breached its repairing covenants, you will also need to bear in mind the requirements of the Leasehold Property (Repairs) Act 1938.
If you want to look into the possibility of forfeiting the lease and regaining possession of the premises, you should ensure that you do not waive the right to forfeit in the meantime.
What is waiver?
No matter what your intention, you will waive the right to forfeit if you: (a) know of your tenant’s breach; and (b) do something which unequivocally recognises the lease as existing or continuing. In order for there to be waiver, your act which treats the lease as if it is still in existence must also have been communicated to the tenant.
Always think: - Will what I am about to do treat the lease as if it still exists? Am I doing something which I am only allowed to do by virtue of the lease?
Potential acts of waiver
- Demanding or accepting sums due under the lease.
- Levying CRAR.
- Negotiating or granting consents required under the lease.
- Serving notices under the lease.
- Serving statutory notices.
- Seeking an injunction against a breach of covenant.
- Arranging to inspect the premises.
- Offering to accept or negotiating a surrender of the lease.
For some breaches (which are called “continuing breaches”), it may not be a problem if you waive the right to forfeit because the right can arise again. However, it is generally better to take a cautious approach at first, until you have confirmed the nature of the breach.
Some of the common breaches of lease, e.g. non-payment of rent, unauthorised assignment, unauthorised subletting and insolvency, are all regarded as “once and for all” breaches. This means that waiver in those cases would lose you the right to forfeit until there is any further breach by the tenant.
Preserving the right to forfeit
In order to preserve the right to forfeit, you should:
- Ensure that no sums due under the lease are demanded or accepted, even on a without prejudice basis. Any letters to the tenant to chase arrears should be carefully worded, so that they do not waive the right to forfeit.
- Only communicate with the tenant and/or its representatives on a without prejudice basis, if at all.
How does forfeiture take place?
As a general rule, a landlord must show a clear intention to forfeit the lease. Any action taken must, therefore, be unequivocal and demonstrate an intention to forfeit. For instance, where a tenant absconded and the landlord changed the locks to keep out trespassers, but did not intend to forfeit, no forfeiture took place.
- This is usually done by changing locks of the premises in question and can also be done constructively by letting to a third party.
- At common law, a landlord is entitled to use reasonable force to regain possession but take care: it is a criminal offence to use violence to gain entry if there is a person physically on the premises who is opposed to the re-entry (section 6, Criminal Law Act 1977). Re-entry is also unlawful if there is anyone residing in the premises or part of them (section 2, Protection from Eviction Act 1977). In practice, this usually means that the remedy of re-entry is restricted to commercial premises outside of working hours.
- In addition, the landlord may not forfeit by physical re-entry without the leave of the court:
- in certain cases where the tenant is insolvent; and
- where the forfeiture is for breach of a covenant to repair and the tenant has claimed the benefit of the Leasehold Property (Repairs) Act 1938.
Forfeiture by the issue of court proceedings
- Issue and service of a claim for possession will operate to forfeit a lease but the claim must be unequivocal and must be served in order to bring it to the attention of the tenant.