Sometimes developers will acquire sites containing problem tenants who may consistently be in arrears of rent or in breach of covenants under their leases. It is understandable in these circumstances that a developer, when becoming a landlord, may want to remove these tenants from the site and obtain vacant possession so as to attract better tenants and generate additional income. Often you hear developers wanting to avail themselves of the forfeiture clause in the lease as a panacea to this problem. However, unless carefully considered, the exercise of this draconian remedy can have some nasty pitfalls.In this e-bulletin, we examine some of the issues which any developer landlord should bear in mind before attempting to go down the forfeiture route without first having sought legal advice.
1. Obtain freeholder's consent to forfeiture?
Sometimes, the developer will be taking an investment headlease (of which it will be tenant) rather than a freehold of the site. This may then contain upward obligations on the part of the developer landlord in favour of the head landlord to ensure that income is maximised. For example, the developer landlord may have covenanted to use all reasonable endeavours to:
- maximise the amount of income from its occupational undertenants so far as is consistent with the principles of good estate management and the headlease on the basis of long term investment; or
- procure that (save during periods of redevelopment, rebuilding or refurbishment and reasonable periods) all parts of the development site which are available for letting are kept underlet;
- procure the prompt recovery by the developer landlord of all sums payable under any underleases and due compliance with the obligations in them.
Whilst these examples do not expressly prohibit the developer landlord from forfeiting underleases, a freeholder might for its own reasons try to argue that forfeiting an underlease (particularly without having a replacement tenant lined up), even in circumstances where the developer landlord is of the view that the premises are under-rented, constitutes a breach. Depending on the terms of the headlease, it may therefore be necessary first to negotiate the head landlord's consent to the forfeiture of the offending underlease by means of a consent letter, to avoid any later arguments about breach of the headlease.
2. What is forfeiture?
Forfeiture is an irrevocable act, pursuant to an express right in a tenant's lease, which enables a developer landlord to take possession of the premises. To forfeit a lease, the developer landlord must demonstrate an unequivocal intention to treat the lease as ended and must do so in accordance with the express terms set out in the lease. Other than in cases based upon non-payment of rent, a landlord cannot forfeit a lease for breach of covenant (for example, breach of the repairing or redecoration covenant) unless and until it has served (and allowed to expire) a "section 146 notice" under the Law of Property Act 1925, giving the tenant a reasonable time to remedy the breach. There are also usually grace periods included in leases which must first be complied with before attempting to enforce a right of forfeiture for non-payment of rent.
3. Effecting forfeiture by peaceable re-entry
If, after taking legal advice, a developer landlord decides to effect forfeiture then it will often want to do so by the most simple means, namely, peaceably re-entering the premises (as opposed to going to Court to get an order). The tenant should not be given any prior notice of this. Practically it would simply mean changing the locks on the premises in order to exclude the tenant. Although there is no strict legal need to do so, it is advisable to attach a notice to the premises (after the locks have been changed) confirming to the tenant that the lease has been forfeited.
One very important point to bear in mind is that a developer landlord should not attempt to forfeit a lease by peaceable re-entry if there is any risk that there is anyone in the premises, as this will constitute a criminal act. It may therefore be preferable to change the locks in the evening or early morning, if the landlord is entirely sure that no one is inside the premises. We would normally expect that a developer landlord will use bailiffs to effect forfeiture and they should obviously be made aware of the importance of this. Once the lease is forfeited, as the law stands, the tenant will thereby be released from any continuing liability under it, ie for any future rent. The tenant will remain liable for breaches up to the point of forfeiture, including any arrears and any failure to repair.
4. Avoiding waiver!
It is crucial that care is taken, especially in rent arrears scenarios, not to waive the right to forfeit, which will occur if the developer landlord or its agents, with knowledge of the rent arrears, act in such a way which recognises to the tenant the existence of the lease. For example, if the developer landlord were to continue to demand or accept rent or communicate with the tenant in any way that is consistent with the tenancy continuing this would waive the right to forfeit for that quarter's/month's arrears. It is also sensible to put a stop on that quarter's/month's rent demand if you are considering forfeiture, because a demand for current/new rent will be sufficient to amount to a waiver on its own.
Once the lease has been forfeited, the developer landlord might then wish to discuss the option of issuing a statutory demand on the tenant for the arrears or issuing Court proceedings to recover these arrears..
5. Beware relief from forfeiture...
One of the reasons why it is so important to seek legal advice before effecting a right to forfeiture under a lease is because a tenant (and their mortgagees) have the ability to apply to Court for relief from forfeiture. Strictly speaking, there is no time limit for a tenant to seek relief where there has been a peaceable re-entry, but it is usually measured as being about the same as the six month period which applies to forfeiture through a Court claim. Furthermore, if the developer landlord has not correctly complied with the right to forfeit under the lease, then the tenant may also have a claim for damages for losses arising out of the wrongful forfeiture (including the time the tenant was kept out of the premises).
For arrears of rent there is a statutory right to be granted relief in circumstances where the rent and interest is paid off. As stated above, if there are other breaches such as disrepair or breach of user provisions then a separate process would be needed involving a statutory section 146 notice (and for dilapidations there are potentially further hoops to jump through). If you are considering forfeiting for more than just an arrears breach then it is vital to take detailed advice to ensure this is done correctly.
Where a tenant succeeds in obtaining relief from forfeiture, it will be entitled to move back into the premises and the lease will be treated as continuing on its original terms.
There is also a potential concern where the developer landlord is considering granting another lease of the premises within the 6 month period following forfeiture, in case the tenant does get relief. The developer landlord should therefore be minded to insist that a break clause is inserted into any new tenant's lease in order for that lease to be terminated early if necessary. It would also need to be excluded from the statutory protection of the Landlord and Tenant Act 1954 so that it can in fact be terminated. A developer landlord would almost certainly want any new lease to be excluded from the 1954 Act anyway, on the basis that this will allow a later termination (at the expiry of the term, or pursuant to a break clause) without proving a termination ground, and without payment of statutory compensation, at the point when the development begins.
6. What about the tenant's possessions?
If the developer landlord successfully effects forfeiture by peaceable re-entry, inevitably the tenant's possessions will remain in the premises and you will then need to write to the tenant, confirming that the stock and possessions will be held by the developer landlord for a reasonable period for the tenant to collect. It may even be necessary to issue a Torts Act notice to require the ex-tenant to collect the goods. For more information on Torts Act notices, see the HSF Real Estate Development Blog post about Torts Act notices on 2 November 2016.