In the current economic climate, forfeiture may not be desirable for a number of reasons, not least whether the property is unlikely to be re-let. If a tenant cannot be found within the applicable grace period, the landlord will generally become liable to pay full business rates on the property. Peter Cosmetatos of the British Property Federation says that "Since empty rates relief was restricted, this is becoming an increasing problem, particularly for intermediate tenants. Freeholders faced with empty rates liability may be able to demolish a building in order to terminate their rates liability, but intermediate tenants are very unlikely to have that option, so their position will be particularly difficult in the current market. Owners of new or recently refurbished property will also be hard hit, as demolition won't generally make economic sense."
However, where the landlord is aware that the property is key to the tenant's business, forfeiture could be a useful strategic step. Where the tenant is a large organisation, the administrators will have a huge number of issues to deal with and a landlord may have to wait months before the administrator turns his attention to the premises. In that time, the administrator is unlikely to volunteer to pay the rent. By using forfeiture tactically, the landlord may be able to jump the queue, gaining the administrator's attention early and increasing the landlord's negotiating position in an attempt to secure payment of ongoing rent.
Whether or not forfeiture is an option available to the landlord depends on the forfeiture provisions in the lease, and on the stage the tenant's insolvency has reached. Where the tenant is in breach of a lease covenant (e.g. non-payment of rent), this could be used as the ground of forfeiture. However, where the tenant's insolvency is sudden, with the result that the tenant is not in breach of covenant, a close examination of the forfeiture provisions in the case of insolvency will be required.
The lease may provide that it can be forfeited in the event of specific types of insolvency. Alternative trigger events may be where the tenant becomes unable to pay its debts as they fall due, or where the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
If the landlord forfeits the lease at a time when it was not entitled to do so, the tenant will be granted relief from forfeiture and the landlord may be liable for damages for any loss that the tenant suffers as a result.
What if the tenant has already gone into administration?
Once the administration takes effect a moratorium will prevent action by creditors.
In these circumstances, a landlord will still be able to forfeit, but must first obtain the consent of the administrator, or of the court.
The administrator may require the premises for the purposes of the administration. In these circumstances the court will refuse the landlord's forfeiture application but the landlord should seek to impose terms that the rent be paid as an expense of the administration. This will improve its position over other unsecured creditors.
If the administrator does not require the premises, and where the market for the premises is weak, or where there is another party liable for the rent, a landlord may tactically decide not to forfeit so as to avoid business rates liability. If the administrators find a buyer for the business, that purchase may or may not include the premises. If the purchaser does take the premises, the landlord will have a new party against from whom to recover the rent.
As soon as the landlord knows that he may be able to forfeit, he must be careful not to waive his right to forfeit. If the landlord wants to preserve the right to forfeit, then all communications with the tenant must be stopped with immediate effect.
Before the tenant enters administration, it will still be possible to forfeit the lease. Landlords who wish to do this should do the following.
- Immediately serve a notice under section 146 of the Law of Property Act 1925 (required for all breaches except non payment of rent). The breach complained of must be one of the grounds for forfeiture in the lease. If there are no other breaches of covenant, depending on the terms of the lease, the landlord may be able to forfeit on the ground that the tenant is unable to pay its debts as they fall due.
- Forfeit the lease by peaceably re-entering the premises a short time later. Normally the tenant should be allowed a reasonable time to remedy the breach. Where the matter is urgent because the landlord suspects that an administration is imminent, the landlord can truncate this timeframe but may be criticised for doing so.
- Put up notices at the property stating that the landlord has re-entered the premises.
- Send notice of forfeiture to the tenant.
- At this stage, communications can recommence on a without prejudice basis. If the landlord is willing to let the tenant back into occupation, a new lease will need to be completed.
Once the administration takes effect, the landlord can still serve the s146 notice, but may not actually forfeit without first obtaining permission either from the administrator or the court. In considering whether to grant permission, the court will take into account how quickly the landlord applied for permission and will balance the interests of the landlord against those of other creditors. Permission to forfeit is more likely to be granted if the landlord can show that by allowing the tenant to remain in occupation, he will effectively have to fund the administration (by paying third party costs that it would normally recover from the tenant).
Once the landlord makes an application to court for permission to forfeit, he can recommence without prejudice communications with the administrator. If negotiations lead to the landlord being sufficiently reassured, the court application can be stayed or discontinued. In this case there will be no need for a new lease to be completed, as the existing lease will not have been forfeited.