Where a lessee granted a new lease to a controversially-run Chinese restaurant, the outcome gave the lessee indigestion. In July 2015 a court granted the lessee relief from forfeiture of his lease. How did the lessee escape the chop and what should a landlord expect when bad behaviour is on its tenant’s menu?
Make me one with everything
It’s not just Chinese. In March 2015, the courts grappled with a dispute between the landlord and tenant of a takeaway pizza restaurant. The tenant could not find a way to comply both with planning conditions about ventilation and the terms of the lease at the same time.
Five months later, it was a Chinese restaurant that led to more litigation. In both cases, the county court judge was annoyed by the tenant’s behaviour and it was left to the Court of Appeal to give a detached, proportionate response.
This note focuses on the second case.
The controversially-run Chinese restaurant
The landlord was the management company of a large block of flats, so each resident had a share in the company. The company had granted a 99-year lease of seven commercial units to a lessee, in consideration of a premium but at nil rent. The rack rents from the seven units had an investment value estimated at £2 million.
Sadly, the lessee granted a new lease of one of the units to the Chinese restaurant at a time when the restaurant was considered by the landlord to be a nuisance and annoyance. The lessee did not seek landlord’s consent for the new lease, putting the lessee in breach of the lease covenants. The lessee admitted that the breach was deliberate in that he knew he ought to have obtained landlord’s consent to the transaction.
After dinner speech
The landlord forfeited the headlease. The lessee applied for relief from forfeiture. The county court judge refused relief, leaving the lessee to appeal to the Court of Appeal.
There was much discussion around the loss to the lessee and the windfall to the landlord if the £2 million headlease was forfeited. The court quoted with approval a comment from the pizza case that the purpose of the reservation of a right of forfeiture is to provide the landlord with some security for the performance of the tenant’s covenants. The court also said that once it has been appreciated that the value of the leasehold interest is an advantage which the landlord will obtain from forfeiture, it has to be thrown into the balance with all the other circumstances.
Critically, the lessee, as part of its damage limitation strategy, succeeded in negotiating surrender by the Chinese restaurant tenant of its new lease. This cured the breach. The lessee asked for a solution that would release the landlord from having to deal with the lessee himself but not generate a windfall for the landlord. So the shape of the relief from forfeiture for which the lessee applied was that it should be for the purposes of and conditional upon the sale of the headlease within six months from the date of the court order.
The court gave the lessee the 6 months’ time to sell.
This particular lessee was able to realise value, but the landlord did not achieve any windfall. Critically, the breach of the lease was cured by the surrender of the new restaurant lease back to the lessee and concerns about the lessee’s future behaviour were met by his decision to sell up.
Even where a breach of a valuable lease is deliberate, the court will be reluctant to allow the landlord to enjoy a windfall by forfeiture. But the tenant must cure the breach and relief may not mean that the tenant remains the tenant for very long.