In two recent cases, the Court of Appeal has looked at the factors to be taken into account when considering whether to grant relief from forfeiture to a tenant who has breached the covenants in its lease. In both cases, the Court of Appeal found that relief should be granted where forfeiture would otherwise result in the landlord gaining a windfall.

Background

The Courts have a discretionary power to grant relief from forfeiture for breaches of covenants other than the non-payment of rent. Although the Courts have historically refused to lay down rigid rules setting out when relief should be granted or not, relief will generally be granted where:

  • The tenant remedies the breach or, if the breach cannot be remedied, pays adequate compensation to the landlord, and
  • The Court is satisfied that the tenant will comply with its obligations under the lease in the future

But the Court will also consider other factors such as the conduct of the tenant and whether the breach was deliberate. The Court has to carry out a balancing exercise between the advantage that the landlord may gain as a result of forfeiture, the disadvantage caused to the tenant by forfeiture and the damage suffered by the landlord as a result of the tenant’s breach. All these factors were weighed by the Court of Appeal in Magnic Ltd v Ul-Hassan and Friefeld v West Kensington Court Ltd. In both cases, avoiding the landlord receiving a disproportionate windfall was considered to be a deciding factor in favour of granting relief from forfeiture to the tenant.

Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224

Mr Ul-Hassan had a 125 year long lease of commercial premises. His son had acquired the sub-lease of the premises and together they operated a takeaway pizza business from those premises. Both the lease and the sub-lease contained covenants to comply with planning legislation. Ul-Hassan and his son had obtained planning permission to use the premises as a takeaway restaurant but this permission was subject to the installation of a fume-extraction system. The demised premises did not include the exterior of the building so that Ul-Hassan needed the landlord’s permission to install the extraction system. Ul-Hassan sought landlord’s consent but this was refused by the landlord. As the planning condition was not satisfied the planning permission eventually lapsed leaving Ul-Hassan in breach of his lease.

There was a series of proceedings between the parties where the landlord sought possession which eventually resulted in the lease being forfeited unless Ul-Hassan ceased business by a required date. Ul-Hassan appealed and continued trading pending his appeal in the mistaken belief that his appeal gave him a stay of execution. When Ul-Hassan’s appeal was dismissed, the landlord sought a declaration that the lease was forfeited and Ul-Hassan applied for relief from forfeiture. Both the District Judge and the County Court dismissed the application for relief so Ul- Hassan appealed to the Court of Appeal.

The Court of Appeal focussed on the way the Court of first instance had exercised its discretion and found that:

  1. The District Judge had incorrectly characterised Ul-Hassan’s continuation of business as “a deliberate decision” when this was in fact a genuine misunderstanding about whether the stay of execution following the first appeal had also extended the deadline for him to cease trading
  2. This had in turn impacted upon the weight given by the District Judge to the windfall that the landlord would obtain from forfeiture. In other words, the fact that the lease was worth about GBP 150,000 should have weighed quite heavily in favour of granting relief but the District Judge had given this less weight because he wrongly considered that there had been persistent failures by Ul- Hassan to satisfy conditions imposed by the Court
  3. Finally, the District Judge was wrong to state that there  had been no significant changes in Ul-Hassan’s position, when he had in fact ceased trading as soon as the first appeal had been dismissed
  4. The District Judge had failed to take into account all the circumstances. The Court must carry out a balancing exercise and give proper weight to the reason for non- compliance. In thi instance, it was disproportionate to deprive Ul-Hassan of his property (and the valuable asset that the lease represented) because of a legal error when his extra few months’ trading had not caused the landlord any additional damage

Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806

Mr Freifeld was the tenant of seven commercial units, one of which was sub-let to a Chinese restaurant business without the landlord’s consent and in breach of the lease. The restaurant was causing issues with other occupiers on the landlord’s estate so the landlord applied for forfeiture.

Freifeld made a first application for relief on such terms  as the Court saw fit but relief was refused. By then Freifeld had procured the surrender of the infringing sub-lease. It therefore re-applied for relief, this time on the condition that it had to assign the lease within six months, failing which it would surrender the lease. Once again, the Court refused the application so Freifeld appealed.

The appeal focussed on the fact that the lease was worth GBP 1-2 million so that forfeiture would result in the landlord gaining a significant windfall. While the Judge at first instance had considered this windfall, he had considered that this should make the tenant more scrupulous in complying with his obligations under the lease and, because the breach had been deliberate, relief should be refused. The Court of Appeal rejected this approach:

  1. While the wilfulness of the breach is a relevant factor to be taken into account, the fact that the breach is deliberate does not mean that relief cannot be granted. The Court of Appeal reiterated the well-established principle that the Court is not required to find exceptional circumstances to grant relief in such a case
  2. It repeated the points made in Magnic v Ul-Hassan that when considering whether to grant relief the Court should have regard to the value of the leasehold interest. By obtaining forfeiture the landlord should not be able to gain a disproportionate windfall for a breach that has not caused him irreparable damage
  3. Taking these factors into account, the Court must carry out a balancing exercise. The question of the landlord’s windfall must be considered on its own and then weighed against the tenant’s conduct

Conclusion

These decisions reinforce the principle that forfeiture provisions in a lease are intended to ensure compliance by the tenant with its lease obligations but are not intended to have excessively penal consequences by depriving the tenant of a valuable asset in favour of the landlord. While this may provide some comfort to tenants, the Court of Appeal has made it clear that these decisions should not be misinterpreted as giving tenants carte blanche to disregard their obligations, as the Court will have regard  to all the circumstances in each case and could still refuse relief if forfeiture is the only way to ensure the tenant’s performance of its covenants. In addition obtaining relief from forfeiture is usually a costly remedy for a tenant who is normally required to indemnify its landlord for all legal and other costs incurred.