On 13 June 2016, the High Court handed down its decision in Pineport Limited –v- Grangeglen Limited [2016] EWHC 1318 (CH). The case concerns relief from forfeiture where the landlord had forfeited a lease using peaceable re-entry i.e. physically entering the premises and changing the locks. The tenant made an application for relief from forfeiture 14 months after the date of re-entry and the Court granted relief, despite the significant delay. The case explores the factors that the Court should consider when exercising its equitable discretion to grant relief from forfeiture.

Background

Pineport is an unusual case and the decision is very specific to the facts of the case. It should certainly not be seen as allowing relief from forfeiture after 14 months in every case! The tenant, Pineport Limited, held a 125-year lease of a commercial unit, which it had purchased for a premium of £90,000. The company operated an MOT and garage service business at the premises and was under the control of one of its shareholders and directors, Mr Shorab Jadunandan. At the time of the trial, the unit had an estimated value of £275,000. The rent payable under the lease was made up of a ground rent of £100 per year, insurance payments, and service charges. The lease gave the landlord, Grangeglen Limited, a right to re-enter the premises if the rent was unpaid for a period of 21 days.

On 24 April 2014, the landlord exercised its right to forfeiture by peaceable re-entry as a result of unpaid rent. At the time of re-entry, the tenant’s arrears were £2,155.00. The tenant’s claim for relief from forfeiture was not issued until 23 June 2015, 14 months later.

At the time of the trial, the director, Mr Jadunandan was serving a prison sentence. He had been prosecuted in 2014 for issuing MOT certificates without following the correct procedure. He pleaded guilty to the charges against him and was sentenced to 18 months’ imprisonment. As a result of the criminal proceedings, the tenant’s assets had been frozen placing the company in financial difficulty. Mr Jadunandan had also suffered and been treated for depression in the period following the landlord’s re-entry. He argued that his ill health had prevented him from seeking legal advice and applying for relief from forfeiture earlier.

The application for relief was dealt with by the High Court as the county court did not have jurisdiction to grant relief in the circumstances that had arisen.

Forfeiture of commercial leases

By way of background, there are two ways of effecting forfeiture: obtaining a possession order from the Court or peaceable re-entry. Read our blog on forfeiting a commercial lease here. The former method provides the landlord with greater certainty but is more expensive. The latter method is only available for commercial premises and cannot be used against residential occupiers. While forfeiture by peaceable re-entry may be quicker in the short term, there are uncertainties in proceeding this way that may lead to further delays in the long-term. This is vividly illustrated in Pineport.

Where a landlord has forfeited the lease, either by court proceedings or peaceable re-entry, the tenant has a right to seek relief from forfeiture from the Court. If the Court grants the tenant relief, the lease is reinstated as if the forfeiture had not occurred. The procedure for granting relief differs depending on the method used by the landlord to effect forfeiture and whether the action is brought in the county court or in the High Court.

Where forfeiture has been effected through court proceedings, the power of the Court to grant relief is restricted by statute. The statutory provisions place a time limit on the Court’s power to grant relief. The Court is barred from granting relief where the tenant’s application is made 6 months after execution of the possession order.

In the High Court, these time restrictions are not directly applicable to forfeiture by peaceable re-entry. With these cases, the power to grant relief comes from the court’s equitable jurisdiction, where there are no prescribed time limits; although the 6-month limit will be treated as a guide. Therefore, the question is not whether the Court is able to grant relief in applications brought significantly outside the six-month period, but whether it should exercise its discretion to do so.

Factors relevant to granting relief

So what factors will the Court take into account when exercising its discretion? In Pineport, the judge, having reviewed the case law, suggested the following issues should be considered:

  • Has the tenant applied for relief with ‘reasonable promptitude’? In determining this question the Court will look at all the reasons for the tenant’s delay.
  • Has the tenant breached any other covenant in the lease, the circumstances of which are so exceptional that the tenant should be refused relief?
  • Are there any other circumstances in the overall context of the case that should be taken into account? For example, is the value of the lease high in comparison to the level of arrears, or has any prejudice been caused to the landlord by the tenant’s default?
  • On what conditions can relief be granted? The general principle is that relief will only be granted if the landlord can be put back in the position it would have been in had the forfeiture not occurred. For this to be possible the conditions of relief must include terms that tenant pays all the arrears, interest and any other expenses or loss suffered by the landlord as a result of the forfeiture, for example, the landlord’s legal costs.
  • If relief is granted with conditions, is the tenant able to comply with those conditions? The Court will not grant relief unless the tenant can provide evidence that the landlord will be paid within a reasonable time and not at some distant point in the future.

Ultimately, as the Court is exercising its equitable jurisdiction, its discretion is broad. The final decision should come from a review of all the circumstances of the case, taking into account all the relevant issues. The above factors should not be treated as a series of tests that the tenant needs to pass with delay being the first hurdle, but rather as a set of factors that must be considered as a part of the whole.

The Court’s Decision

The Court applied the above considerations to the facts in Pineport and came to the conclusion that relief should be granted to the tenant. The Court’s justification can be summarised as follows:

  • The tenant’s 14-month delay in applying for relief was the Court’s key consideration as it was toughest factor for the tenant to overcome. In the judgement this issue is dealt with last, illustrating the Court’s approach that delay should not be treated as an initial hurdle that the tenant has to surmount before other factors can be considered.

The Court had to decide whether the application had been made with ‘reasonable promptitude’ having due regard to the 6-month guidance period. Having considered all the circumstances of the case, the Court decided that it had. It based its decision on a combination of Mr Jadunandan’s ill health, the tenant’s lack of money and the fact that the tenant had not taken specialist legal advice.

The judge stated ‘reasonable promptitude is an elastic concept which is capable of taking into account human factors.’ While acknowledging that 14 months was ‘near to the breaking point for the concept’s elasticity,’ the judge was satisfied that, in the circumstances of the case, and on the evidence available, the tenant had acted with reasonable promptitude.

Other factors that contributed to the Court’s decision to grant relief were:

  • Mr Jadunandan’s brother was prepared to pay the sums owed to the landlord. The Court was satisfied that the landlord would be paid within 12-16 weeks of trial which was sufficiently soon to be the ‘immediately foreseeable future.’
  • While there had been illegal activity conducted on the premises which pointed against granting relief, the conduct was not so exceptional as to be relevant to the grant or refusal of relief. There was no risk of the illegal activity continuing and no evidence that the premises had been tainted by the tenant’s conduct.
  • The lease had a value of £275,000. The arrears at the time of re-entry had been less than 1% of the value of the lease and the total payable as a condition of granting relief represented about 10% of its value. The Court referred to the ‘severe disproportion’ between the windfall gain to the landlord if relief was refused and the sums owed to the landlord.
  • The landlord was not able to show any prejudice that it had suffered as a result of the unpaid rent, the forfeiture or the delay in the tenant’s application for relief. The landlord had not tried to re-market the property and there was no new tenant lined up who would be prejudiced if relief was granted.

The tenant was therefore granted relief on the condition that it pay the landlord £24,530 within a fixed period.

Comment

The above case illustrates the extent of the Court’s very broad equitable discretion when granting relief from forfeiture. While it was the specific facts of the case that led to the Court granting relief, the judgement does highlight that there is more to determining an application for relief than focusing solely on time limits. The Court should consider the whole context of the case before making its decision and not concentrate on the issue of delay in isolation.

For tenants, the case provides useful guidance on the factors that the Court should consider when dealing with applications for relief from forfeiture; applications which previously may have been considered hopeless due to them being ‘out of time.’

For landlords, the case underlines the uncertainties involved in exercising the right to forfeiture using peaceable re-entry. Before deciding on the best method for forfeiting the lease, landlords should reflect on the value of the lease, the level of arrears and what they know about their tenant’s circumstances and whether there are any ‘mitigating factors’ that could enable the tenant to make a successful application for relief, even after considerable delay.