A sigh of relief for tenants

Freifeld & Anr –v- West Kensington Court Limited [2015] EWCA Civ 806

Summary

The Central London County Court refused the tenants’ application for relief from forfeiture of a valuable long lease which meant the landlord stood to gain a substantial windfall. The tenants therefore appealed.

The Court of Appeal considered the correct approach to granting relief from forfeiture in these circumstances and found in favour of the tenants. However, relief was only granted on specific terms. The case provides useful clarification as to when/how relief may be granted and when it may be withheld.

The facts

The tenants had a head lease of seven commercial units underneath a large residential block in West Kensington. The lease was for a term of 99 years from 1982 and no rent was payable. Had rent been payable, it would have been approximately £133,000 per year. This rendered the lease a valuable asset.

The landlord had long been dissatisfied with the tenants’ conduct and management of the units. In particular a sub-letting to a Chinese restaurant had caused numerous issues for the residential occupiers. Despite this, the tenants had completed a further sub-letting to the Chinese restaurant without the knowledge or consent of the landlord. The tenants subsequently admitted that they ought to have obtained consent before entering into the sub-letting and that they had breached the lease.

The landlord found out about the subletting when it checked the Land Registry. Only after this discovery did the tenant apply for consent. The landlord duly served Section 146 notices in respect of the breach and took steps to forfeit the lease. The tenants belatedly attempted to remedy the position by procuring the surrender of the new sub-lease, but the surrender would not take effect until after the judgment.

The first decision

The first judge made some scathing findings against the tenants, referring to the breach as a ‘cynical disregard’ for their obligations and describing their quest for relief as ‘a vertiginous… climb up to the peak of relief from forfeiture’.

In light of this, despite the fact that the landlord would be handed a substantial windfall in the form of a lease valued at £1,000,000 – £2,000,000, the judge found that the tenants had failed to prove that they were entitled to relief and were ‘reaping what they have sowed’.

The tenants appealed.

The appeal

The tenants proposed that relief should be granted, but made conditional on there being a period of six months within which they could sell the lease and assign it to someone else.

The Court of Appeal was asked to consider three issues:

  • Did the judge direct himself correctly about what had to be shown to obtain relief from forfeiture where there was a deliberate breach?
  • If there was a misdirection at first instance, what order should the Court of Appeal make?
  • If there was no misdirection, how should the Court of Appeal exercise its residual discretion to grant or refuse relief on the findings of the judge and the fresh evidence and new circumstances that had been submitted by both parties?

The decision

The Court found in favour of the tenants, but subject to conditions on the terms of relief.

  • The judge had misdirected himself. Relief could still be granted even if the tenant’s breach was deliberate. The Court’s wide discretion should not be used to allow a landlord to take advantage of a breach that had not caused irreparable damage.

    The high value of the lease was a key factor. However, the fact that forfeiture would benefit the landlord was not by itself sufficient reason to grant relief.

    The deliberate nature of the breach was important because it was not fair to grant relief and to reinstate the contractual position so that tenants who had blatantly disregarded their obligations would be able to take back the lease without any guarantee that it would not happen again in the future. A tenant’s nefarious conduct did need to be considered. However, the judge had failed to balance this by considering whether forfeiture was a proportionate response.

    In this case, the first judge had taken the view that the tenants had brought it upon themselves, which did not take into account the windfall for the landlord. The judge had not considered the option of selling the lease to balance the interests of both parties.

    The judge had also determined that the value of the lease was nil once he had refused relief from forfeiture. The Court felt that this approach was incorrect.

  • The Court made an order for relief but on certain terms. In making its decision, the Court was re-exercising the discretion to grant relief. It decided to take into account further evidence filed by both parties, including the fact that the tenants had finally appointed a managing agent. The Court held that the correct decision was to grant relief but conditional upon the sale of the lease within six months.

    The landlord was not entitled to control the marketing and sale of the lease, nor to a right of prior approval of the purchaser.

  • The Court felt that this question did not arise.

Our views

This is the second case in recent months where a tenant has been spared the full impact of forfeiture (Relief from Forfeiture – Magnic fails to cast a spell)

The decision is interesting because it seems to suggest that, even where a tenant has behaved poorly, the Court may still lean against forfeiture if it considers that the sanction is too severe or the benefit to the landlord is disproportionate.

However, it is important to note that the Court stated the decision should not be misinterpreted as giving tenants carte blanche to disregard their covenants. The Court will attempt to strike a balance between the interests of both parties.

Forfeiture remains a complex and volatile subject with potentially very far-reaching consequences. It will be vital for both landlords and tenants to seek early legal advice if there is any suggestion of a breach.