If enacted largely in its current form, as we expect, the ancient law of forfeiture will be abolished and replaced with a new statutory procedure for bringing a lease to an end in the event of tenant default. The new procedure will apply to all leases, predating and postdating the Act, except in the very rare case of an old lease not containing a forfeiture clause at all.
While primarily aimed at levelling the playing field for the benefit of defaulting tenants, there will be one significant benefit for landlords - the concept of waiver of the right to forfeit by accepting rent following notice of a tenant’s breach will disappear along with all the other common law provisions. Acceptance of rent will no longer affect a landlord’s rights.
Once the bill is enacted, there will be two mutually exclusive routes available to an aggrieved landlord in most circumstances:
- the termination claim, which is essentially a court based process, or
- summary termination which involves direct action largely outside of the court.
While these routes may be similar to the old forfeiture procedures, the statute will give the tenant far more protection than has been the case in the past.
Before a claim can even be made, there must have been a breach of covenant or condition by the tenant and a notice served on the tenant (and other qualifying interest holders - see below) specifying the default, how it must be remedied and by when. The notice must also set out the consequences of non compliance. If the matter reaches the Court, the Judge has three main options:
- A termination order, bringing the lease to an end;
- A remedial order, specifying what the tenant needs to do to remedy the breach of covenant and by when; or
- An order for sale of the leasehold interest and appropriate division of the sale proceeds (where termination would bring an unjustified windfall gain to the landlord).
Before making any order, the Judge must take into account several factors, including the conduct of the parties, the reasonableness of any deadlines imposed, and what the tenant has done and could still do to remedy the breach.
‘Qualifying Interest Holders’, a potentially very large group including the tenant’s mortgagees, its undertenants and their mortgagees, all have the right to apply for various other orders which could compromise the rights previously enjoyed by landlords.
In the event of Tenant Default a landlord can, instead of using the Court based procedure, serve on the tenant and all qualifying interest holders a summary termination notice. The effect of this is to bring the tenancy to an end one month later unless the tenant or a qualifying interest holder applies to the Court for a discharge order.
The Court must make a discharge order unless the landlord is able to show that the tenant would have no realistic prospects of persuading a Court not to grant a termination order if a termination claim had been made.
There are three main situations where summary termination cannot be used, as follows:
- A person is lawfully in residence, ie. this is a remedy for commercial properties only;
- The tenancy has more than 25 years left to run;
- The tenant default is the breach of a repairing covenant and the lease was originally granted for a term exceeding 7 years and there are more than 3 years left to run. This preserves existing tenants’ protection contained in the Landlord and Tenant (Leasehold Repairs) Act 1938.
The end of distress for rent arrears – the Tribunals, Courts and Enforcement Bill This Bill has reached the House of Lords for amendment and is therefore likely to hit the statute book before the Termination of Tenancies Bill.
The landlord’s common law right to distrain against the tenant’s goods to recover arrears of rent will be abolished wholesale to be replaced by a new statutory procedure.
The first important point is that it is restricted to rent in respect of commercial premises and not available for residential rent arrears which are covered by other legislation.
The recovery procedure (to be known as CRAR) is limited to ‘net unpaid rent’, which the Act defines to include VAT and unpaid interest, but not service charges, insurance premiums, and any other sums due under the lease even if they are reserved as rent, less the amount of any sums that a tenant could claim from the landlord by way of deduction or set off. An anti-avoidance section strips out any such disallowed elements of ‘net unpaid rent’ where landlords reserve inclusive rents bundling all the various payments together. Furthermore, regulations will set a minimum level of outstanding rent below which CRAR is not available. Once CRAR is available, a bailiff will serve notice on the tenant taking ‘control’ of the tenant’s goods. The notice must state a minimum period (length to be decided) to allow the tenant time to pay the outstanding rent. Only after the expiry of that notice can the goods be sold.
The bailiff can only take control of goods on the highway or on the premises in respect of which the rent is owed and can only take goods up to the value of the amount owed unless the only available goods exceed that value. Finally, the bailiff cannot take personal belongs or anything in actual use at the time of the visit.
On receipt of the notice, the tenant can apply to the Court for one of two orders, as follows:
- An order setting the notice aside; or
- An order that no further steps are to be taken without a further court order.