When a tenant is in breach of its lease, a landlord can pursue various remedies. One of these is the right to determine the lease by forfeiture.
Kathryn Murphy discusses ten key questions surrounding forfeiture of commercial leases; exploring what the landlord’s rights are, the form of a Section 146 Notice and how to serve it, what constitutes a reasonable time for the tenant to remedy the breach and whether forfeiture is the landlord’s only option on the breach of a tenant’s covenant.
1. What is the right to forfeit?
The right to forfeit is a unilateral right for a landlord to determine a lease on the occurrence of a specified event. The right will often arise by way of an express right in the lease on grounds of non-payment of rent, breach of a tenant covenant and/or because an insolvency event occurs in relation to the tenant.
2. When should a Section 146 Notice be served?
Where there has been a breach by the tenant of a covenant or condition in the lease then, unless the breach complained of is non-payment of rent, the landlord must serve a written notice on the tenant under Section 146 of the Law of Property Act 1925 (a “Section 146 Notice”).
Various statutory and common law limitations protect the rights of the tenant in forfeiture proceedings. Regardless of the provisions of the forfeiture clause in the lease, these must be strictly complied with to ensure that the landlord does not lose its right to forfeit.
3. What form should the Section 146 Notice take?
The Section 146 Notice must:
- specify the particular breach complained of (including which clauses of the lease have been breached and how);
- require the tenant to remedy the breach if the breach is capable of remedy (in general, breach of covenants against underletting and assignment, or illegal or immoral use of the premises, would not be capable of remedy);
- require the tenant to pay compensation for the breach; and
- be served in accordance with the specific notice provisions in the lease (e.g. place and method of service).
Once a valid Section 146 Notice has been served, the landlord is only able to enforce the right of forfeiture if the tenant fails within a reasonable time thereafter to:
1) remedy the breach, if it is capable of remedy; and
2) pay reasonable compensation for the breach to the satisfaction of the landlord.
4. What is a reasonable time for the tenant to remedy the breach?
There is no requirement for a Section 146 Notice to specify an actual time period, which leaves as a question of fact how much time is ‘reasonable’ to allow the tenant to remedy a remediable breach. No action will lie for forfeiture until the reasonable time for remedying the breach has expired. See box for examples of what amounts to a ‘reasonable time’ from case law.
Where the breach is not capable of remedy, the tenant only needs time to consider whether to make an immediate application for relief against forfeiture. Case law has determined that two days is insufficient and five days is sufficient.
5. Following a tenant breach of a repair covenant, when does the right to claim damages arise?
Where the repair covenant in the lease has been breached then, even if the landlord does not intend to forfeit the lease, the landlord must serve a Section 146 Notice if it wishes to bring a damages claim for leases granted for a term of at least seven years with at least three years left to run. The landlord must:
1) serve a Section 146 Notice on the tenant at least one month before bringing the action for damages; and
2) refer to the tenant’s right to serve a counter-notice under the Leasehold 1938 Property (Repairs) Act in the Section 146 Notice itself.
Once the Section 146 Notice has been served, the tenant has 28 days to serve a counter-notice on the landlord. If the tenant serves such a notice, then the consent of the Court is required for the landlord to take any action to forfeit the lease or to claim damages for the breach of the repairing covenant.
6. What if the breach complained of is nonpayment of rent?
Service of a Section 146 Notice is not a pre-requisite to forfeiture in cases of non-payment of rent, though the landlord must first demand the rent from the tenant before exercising its right to forfeit (unless the lease provides otherwise). However, landlords should ensure that they have not waived the breach (see further information below).
7. What happens after the Section 146 Notice has been served?
It is worth noting that the tenant (or any other relevant party, such as an undertenant or mortgagee) may apply for relief for forfeiture as further explored in the March 2018 Real Estate Talking Point.
8. What steps can the landlord take to forfeit?
Assuming the right to forfeit the lease has arisen and a Section 146 Notice, where relevant, has been served, there are two methods by which the landlord may exercise its right to forfeit the lease. The landlord can either peaceably re-enter the premises (for example, by changing the locks when the tenant is not in physical occupation), or issue proceedings in Court. Insolvency legislation restricts the landlord’s right to forfeit in certain circumstances and so, where an insolvency event has arisen in respect of the tenant, the landlord might, for example, only be entitled to forfeit with the permission of the Court.
9. Can a landlord lose the right to forfeit?
It is important that a landlord does not do anything that might constitute a waiver of the breach, otherwise its right to forfeit may be lost.
Waiver can occur where the landlord (or someone acting on his behalf), with knowledge of circumstances that give rise to a right to forfeit, does some unequivocal act recognising the continued existence of the lease, and the act in question is communicated to the tenant. The most common example of this is a landlord demanding rent which falls due after learning of the breach of covenant.
The implications may be less severe where the breach in question is a ‘continuing’ breach (where the breach arises afresh each day and will accordingly survive an act of waiver) rather than a ‘once and for all’ breach of covenant.
10. Is forfeiture the only option?
Forfeiture may not be the only option available to a landlord, and a landlord would be advised to consult with their lawyers to establish whether it is the preferred course of action. The landlord might prefer to seek alternative remedies to compensate it for the breach and to secure performance of the tenant’s covenants under the lease going forward.
Though not considered in detail here, these alternative options may include:
1) self-help remedies (e.g. a landlord’s right to re-enter the property, carry out the works and recover the costs from the tenant);
2) damages – to put the landlord back into the position it should have been in if the tenant had not breached the terms of their lease;
3) specific performance – where the Courts consider that this is an adequate remedy, they will not order damages; and
4) injunctions – a discretionary remedy of the Courts to require the tenant to remedy any breaches and/or to restrain the tenant from committing future breaches.