Forfeiture is an area of the law of landlord and tenant which is, in equal measure, both technical and confusing.
The following two examples illustrate this:
Changing the locks
Imagine you are a shopkeeper, trading from a small lock-up shop in a location which is very far from prime. It is your first venture, and you treated the detail of the lease terms as ‘the small print’, relying on your solicitor to deal with it. Flushed with the pride of the new business proprietor, you have brightly painted the exterior of the shop, unaware of the term in your lease forbidding alterations to the external appearance of the premises without the landlord’s consent. You were irritated to receive a formal notice from the landlord requiring you to return the shop to its previous appearance, and you put it in the ‘later’ tray, with a mental note to telephone the landlord and sort it out at some point.
Two weeks later, you are shocked to arrive at the premises in the morning and find that the landlord has changed the locks, and put a notice up on the window saying that the lease has been terminated. On consulting your solicitor, you discover that the landlord was perfectly within his rights, and that to get your shop back you will have to (a) repaint the shop, (b) go to court, and (c) pay both sides’ costs of the court proceedings, even if you are successful. To resume your livelihood may take several weeks. And all this because you didn’t get the landlord to approve the paint colour!
This time, imagine you are the landlord of the same premises, and that you retain managing agents to manage the property for you. Instead of just repainting the exterior of the premises, the tenant has completely reconfigured the internal layout, removing and repositioning some non-structural internal partition walls, and has installed some noisy refrigeration plant at the rear. You own the neighbouring property, a shop with a flat above, and the flat tenant is complaining vigorously about the noise from the refrigeration plant, which goes on all night. When you raise it with the managing agents, they say they will go and inspect, and have a word with the tenant.
It subsequently transpires that a week later they sent out the quarterly rent demand, and then accepted the tenant’s rent payment, thus waiving your right to forfeit the lease. None of this was your doing, but you are now stuck with a management headache, and your only quick and cheap solution has been taken away.
The road to reform
The view expressed by the Law Commission in its consultation paper “Termination of Tenancies for Tenant Default” was that the law of forfeiture “is complex, it lacks coherence, and it can lead to injustice”. However, whatever its complexities, the law of forfeiture as it presently stands remains a powerful tool by which a landlord may force a tenant to comply with a lease, albeit a tool which requires some technical competence to wield effectively.
In light of the above view, the Law Commission has proposed that the law of forfeiture should be abolished and replaced with a new statutory scheme. That view has found almost universal support amongst the judiciary, the legal profession, landlords, tenants and the government. In the next issue of Property Matters we will focus on the proposals for the new statutory scheme; in this issue, we consider the issues and pitfalls of which all landlords and tenants should be aware in relation to forfeiture as it currently exists.
When does the landlord’s right to forfeit arise?
The landlord’s right to forfeit is his right to determine a lease, exerciseable in the event of some default by the tenant which, when exercised, operates to bring the lease to an end earlier than it would naturally terminate.
A right to forfeit arises:
- where there has been a breach of condition in the lease; or
- where there has been a breach of any covenant, so long as the lease itself contains an express right to forfeit in that event.
In reality, landlords mostly rely on the latter eventuality, as it is not necessarily easy to decide whether a covenant amounts to a condition.
Are there any formalities to be complied with?
Where the landlord intends to forfeit in respect of a tenant’s breach of covenant, his right to forfeit will not be enforceable unless and until he serves on the tenant a notice under Section 146 of the Law of Property Act 1925 (“LPA 1925”) which:
- specifies the particular breach complained of;
- requires the tenant to remedy the breach (if it is capable of remedy);
- requires the tenant to make compensation in money for the breach.
The LPA 1925 does not prescribe a specific time limit within which the breach is to be remedied. It simply provides that the landlord must wait a “reasonable time” in order to allow the tenant to effect the required remedial action. What will constitute a reasonable time will vary in each case. However, the reasonable time must be sufficient for remedying all the breaches specified in the notice. No forfeiture action can be taken by the landlord on any breaches until a reasonable time for remedying them all has expired.
The important exception to this notice requirement is where the landlord intends to forfeit on the single ground of non-payment of rent, in which case no s.146 notice need be served, and the landlord need not wait a reasonable time for payment.
How is forfeiture carried out?
Forfeiture may be actual, by physical re-entry (often called “peaceable” re-entry); or it may be constructive, by the issue of legal proceedings.
Forfeiture by physical re-entry is usually done by changing the locks on the premises in question. Most forfeiture clauses allow the landlord to re-enter part of the property in the name of the whole. In consequence, securing part of the premises is often sufficient to effect the forfeiture. Forfeiture by physical re-entry operates to terminate the lease immediately, subject only to any claim by the tenant for relief against forfeiture.
Landlords must be careful: a criminal offence will be committed if force is used in order to gain entry if there is some person physically present on the premises who is opposed to the re-entry. In practice, this usually means that landlords may only really effect physical re-entry of commercial premises outside normal working hours. Further, in some circumstances (eg in certain cases where the tenant is in some form of insolvency), the landlord may not forfeit by physical re-entry without first having obtained the permission of the court.
Forfeiture by Court Proceedings
It is the actual service of the court proceedings claiming possession on the tenant, and not the mere issue of them by the court, which effects the forfeiture of the lease.
The period between service of the court proceedings and the entry by the court of judgment in the landlord’s favour has been described as a “twilight period” or a “period of limbo”. In the words of the eminent Chancery Judge, Sir Robert Megarry, the lease “has a trance-like existence … no one can assert with assurance whether it is alive or dead”.
Waiver of the landlord’s right to forfeit
The doctrine of waiver comprises a deep, though well-disguised, trap for unwary landlords. For that reason, we often advise our landlord clients that once they have decided to exercise their right to forfeit, they should not accept any cheques from the tenant and should not communicate with the tenant at all without first having spoken to their lawyer. It is very easy for a landlord unwittingly to lose his right to forfeit.
Waiver of the landlord’s right to forfeit occurs where the landlord (or someone acting on his behalf), with knowledge of circumstances which 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 trap which a landlord most commonly falls into is demanding rent which fell due after he learnt of the breach of covenant. Such demand waives his right to forfeit for the breach in question.
All may not, however, be lost, since the landlord should always bear in mind the distinction between “once and for all” breaches of covenant and “continuing” breaches.
Where there is a breach of covenant which is committed “once and for all”, waiver of the right to forfeit for the breach precludes the landlord from ever forfeiting for that breach. The most common examples of “once and for all” breaches of covenant are arrears of rent, assignment and sub-letting, failure to carry out repairs by a specified date, and alterations.
In the case of “continuing” breaches, the breach arises afresh each day and will accordingly survive an act of waiver. The most common examples of “continuing” breaches of covenant are failure to keep the demised premises in repair, failure to keep them insured in a certain manner during the term and use in a prohibited manner.
Relief against forfeiture
A tenant may always apply to the court for relief from forfeiture while the landlord is proceeding to enforce his right of re-entry and, by so doing, may thwart the landlord’s forfeiture.
Tenants should be aware of the strict time limits within which an application for relief must be made. Where the landlord has commenced forfeiture proceedings and not only recovers possession by the judgment of the court, but also enforces the judgment so as to recover actual possession, the landlord has then ceased to “proceed” to enforce his right of re-entry and the tenant’s ability to apply for relief will have been lost.
Where, however, the landlord has physically re-entered the premises without a court order, the tenant’s ability to apply for relief will continue to exist even after the landlord has changed the locks. Theoretically, therefore, the tenant retains his right to seek relief forever (providing the landlord does not later obtain a judgment for possession) although in practice the court will probably strain against granting relief a long time after the landlord changed the locks, particularly if the landlord has installed a new tenant.
It should be noted that the right to apply for relief lies not only with the tenant but also with others who have “interests” deriving from the tenancy (for example sub-tenants and mortgagees) although by the time that the owners of such derivative interests learn of the landlord’s actions, the right to ask the court for relief has often been lost.
The case for reform
This article highlights only some of the subtle complexities of the law of forfeiture. Some of the distinctions made above, such as that between “once and for all” and “continuing” breaches, are generally recognised to be illogical and difficult to sustain. As His Honour Judge Collier QC said in Wrexhaven v Nurse:“unless and until the particular legal minefield, which comprises the law as to the forfeiture of leases, is codified and reformed and some element of rationality introduced thereto, there will always be startling anomalies. Odd, and uneven, and unexpected, and unforeseeable results – some people would say unfair results - will constantly occur until this minefield is cleared”.
It is the Law Commission’s proposals for a root and branch reform of the law of forfeiture to which we will turn our attention in the next issue.
A Point of Clarity
In the last Property Matters, we commented on the case of Business Environment Bow Lane Ltd v Deanwater Estates Ltd, a High Court decision concerning side agreements. The case has since gone to the Court of Appeal, and the outcome has borne out some of the observations we made.
A brief reminder of the facts:
- The defendant (‘Deanwater’) was negotiating to take a lease, which was to contain a tenant’s break clause.
- They anticipated exercising the break, but did not want to be saddled with a dilapidations claim when they did so.
- The then landlord (‘Lionbrook’), assured them that no terminal dilapidations claim would be made, and on the strength of that assurance they entered into the lease, on terms including a tenant’s repairing obligation.
- In due course Deanwater exercised the break; shortly after it had taken effect, Lionbrook transferred their interest in the property to the claimant, and also assigned to them the cause of action for breach of repairing obligations.
- The claimant then served a schedule of dilapidations, and issued these proceedings.
- The question of whether Deanwater was entitled to rely on the assurance given by Lionbrook was tried as a preliminary issue.
- The decision, in summary, was that Deanbrook entered into the lease in reliance on an assurance by Lionbrook to the effect that there would be no terminal dilapidations claim, which took effect either as a collateral contract, or as a promissory estoppel.
- Lionbrook had therefore had no claim for damages for breach of repairing covenant against Deanwater. The purported assignment of such a claim to the claimant was ineffective.
A borderline case?
We took the view that Deanwater had been lucky in this instance. Lionbrook was ultimately not unwilling to make amendments to the form of lease, but Deanwater did not press them to ensure that the lease correctly reflected the agreed position on dilapidations. Nor, having failed to do that, did they insist upon an unequivocal written side agreement. We pointed out that the failure to document the agreement correctly had nevertheless cost them a trip to the High Court, and that an appeal was a distinct possibility. The appeal, in due course, came.
An unusual feature of the case, as remarked upon previously, is that the court only had documentary evidence to consider, in the form of correspondence and drafts of the lease. All parties were agreed upon the applicable law, so the only issue was whether the judge had correctly interpreted the documentary evidence in the light of the law.
Unanimously, the Court of Appeal disagreed with the trial judge, and allowed the appeal. The decision necessarily turns upon close consideration of the detailed documentation, and all the judges described it as a ‘borderline case’; suffice to say that they took the opposite view from that of the trial judge.
The interest of their decision really lies in their emphasis on the need for certainty and clarity in conveyancing transactions. In the Court’s view, one should be slow to identify collateral contracts or promissory estoppels in situations where two substantial commercial concerns represented by experienced solicitors were in the course of negotiating a detailed commercial document. This was particularly the case where, as in the case of a lease, successors in title could be bound, but would have no way of discovering such terms.
Indeed, one member of the Court observed: “In a normal conveyancing transaction in a commercial context with both parties represented by experienced solicitors the usual course of dealing is to ensure that all agreed terms are put into the contract and conveyance, transfer or lease. Accordingly those who assert a collateral contract in relation to a term not so contained must show that it was intended to have contractual effect separate from the normal conveyancing documents. Otherwise it will be invalidated by s.2 Law of Property (Miscellaneous Provisions) Act 1989”.
Clearly it will be an uphill struggle to establish a collateral contract or promissory estoppel in such circumstances. As we remarked previously, agreed terms should be incorporated into the lease. If not, any side agreement should be in writing, should expressly bind successors in title, and should expressly state that it is a collateral contract for the purposes of the Landlord and Tenant (Covenants) Act 1995.