Forfeiture of a lease is available to a landlord as a remedy when a tenant breaches its covenants. As the recent Court of Appeal case of Magnic v Ul-Hassan demonstrates, however, even that is not necessarily the end of the story. A tenant can apply for relief from forfeiture which, if granted, will resurrect the lease and put the parties in the position as if it had never been terminated. Whether or not to grant relief is at the discretion of the court and this case, whilst providing a helpful reminder of the factors which the court may take into account, highlights just how wide that discretion can be.
The claimant was the landlord and the defendants were tenants of commercial premises pursuant to a 125 year lease which held commercial value. The lease contained a tenant covenant to comply with planning law. The tenants obtained a planning permission which allowed them to run a takeaway restaurant from the premises on the condition that they obtained appropriate exterior ducting over an area of the property which exceeded that demised by the lease. The tenants asked the landlord for permission to erect the ducting. Permission was refused and the landlord even obtained a court declaration that the defendants had no right to erect the ducting. Nevertheless, the tenants continued to operate their takeaway business from the premises, in breach of the planning permission and in breach of the lease. The landlord issued court proceedings to forfeit the lease. Those proceedings were resolved by a consent order which granted the tenants relief from forfeiture subject to certain terms. The tenants did not comply with those terms. The landlord then obtained a further court order, this time a possession order with a proviso that if the tenants ceased business by a certain deadline, they would be granted relief from forfeiture. The tenants appealed and, in the meantime, despite the deadline, they continued to trade.
Following the tenants’ breaches of planning permission, lease, consent order and conditional possession order, a district judge and then the County Court dismissed the tenants’ claim for relief and held that the lease was forfeit. Clearly being a party with some nerve, however, the tenants appealed again, this time to the Court of Appeal.
Decision and discretion
The tenants’ appeal was allowed.
Although the Court of Appeal’s decision may be surprising, and indeed it may seem on its face to be unfair, it is a clear example of the fact that the court has a wide discretion whether to grant relief from forfeiture and it is a reminder of the factors that will be taken into account.
- The court’s discretion whether to grant relief is wide and the courts have refused to lay down rigid guidelines as to the exercise of that discretion.
- As a starting point, however, the tenant should remedy the breach (or pay compensation if the breach cannot be remedied) and the court should be convinced that the tenant will perform its obligations in future.
- The court can take into account:
- the tenant’s conduct (including whether the breach was wilful or deliberate)
- the nature and gravity of the breach and its relationship to the value of the property
- the respective advantage to the landlord and disadvantage to the tenant if the lease remains forfeit.
In Magnic, the Court of Appeal accepted the tenants’ case that when it had applied for an appeal it had also obtained a stay of execution which it, mistakenly but genuinely, believed extended the deadline for ceasing to trade. The court did not therefore characterise the tenants’ behaviour which led to this particular hearing as being in wilful or deliberate breach.
The Court of Appeal also found that the lower courts had given insufficient consideration to the respective advantage (or ‘windfall’) to the landlord and disadvantage to the tenant if the lease of valuable commercial premises remained forfeit.
Lord Justice Pattern  noted that:
- the starting point for the exercise of the court’s discretion should be that the purpose of the right of forfeiture is to provide the landlord with some security for the performance of the tenant's covenants – it is not intended to operate as an additional penalty for breach; and
- in most cases relief will be granted on the breach being remedied and on terms as to costs.
He went on to say that, although the defendants' conduct will have been a cause for concern for any reasonable landlord, it was not suggested in the case that the breaches of covenant were incapable of being remedied, either by the grant of a further planning permission with suitable conditions for the extraction of fumes, or by the cesser of the takeaway business
The law relating to forfeiture and relief is extremely complex. It is full of intricacies and traps for the unwary and individual cases turn on their own facts. What is clear, however, is that where a landlord wishes to extinguish a lease early by reason of a tenant’s default, it must do so with the utmost caution.
This case reiterates that forfeiture is a remedy which should not be taken lightly. Landlords faced with a tenant in breach should take urgent advice from a specialist Real Estate Litigator because, even in cases where forfeiture will be appropriate, the right to forfeit can be easily and inadvertently lost. There are legal and procedural issues which your advisor will be able to help you to consider and navigate. In the vast majority of cases these will need to be addressed immediately when a breach occurs – before even any demand is sent, or any correspondence (verbal or written) is entered into with the tenant.
Similarly, whilst the Magnic decision may be good news for tenants, it should not be interpreted as giving free rein to flout tenants’ lease obligations. Where relief from forfeiture is granted, it is on legally binding terms as to the remedying of any breach[es], the payment of compensation where appropriate and, generally, costs.
Walker Morris’ Real Estate Litigation team acts for both landlords and tenants. We can help you to protect your assets and your rights, whatever your perspective.