The “right of re-entry” or “forfeiture right” is a landlord’s unilateral right to bring a lease to an end in the event of a breach by the tenant. If a lease is successfully forfeit then all interests created out of it will also come to an end, including those of any subtenants or mortgagees. As it is a form of penalty the courts lean against it and will often grant relief if requested, or may find that the right has been waived. This note provides a summary of how and when the right arises, the procedure that a landlord must follow, what relief is available to the tenant and what the landlord can do following forfeiture.
When can a landlord forfeit the lease?
A landlord can only forfeit a lease if it contains a forfeiture clause, setting out the circumstances in which the right can be exercised. While this is a standard clause in commercial leases, it should always be checked as the details vary. A standard clause will allow the landlord to re-enter when the rent is not paid for a specified period (often 14 or 21 days), any tenant covenant is breached, or the tenant becomes insolvent (including preliminary steps being taken in insolvency procedures). The required procedure is different where you are forfeiting for non-payment of rent as compared to any other breach of covenant. Note that if the tenant is insolvent the landlord may be restricted in what action he is able to take: always take advice on this.
Forfeiture for non-payment of rent
What distinguishes non-payment of rent from other breaches is that there is no need for the landlord to give any notice to the tenant prior to forfeiting the lease: if the requirements have been satisfied, and the landlord has not done anything to waive the breach, he can forfeit by either issuing court proceedings seeking possession (and the arrears of rent) or by peaceably re-entering the premises.
The rules relating to non-payment of rent cover all sums reserved as rent under the lease – it is not limited to non-payment of the main rent. However, if other sums (such as service charge or insurance rent) are not reserved as rent, they will be treated like any other breach of covenant. Most modern leases state that a formal demand for payment of rent is not required in order to forfeit – all that is required is that payment has become due. However, where the unpaid sums are service charge or insurance rent it is likely that the lease will require these to be demanded before they fall due.
Forfeiture for other breaches of covenant
Where the tenant is in breach of a covenant other than the covenant to pay rent, the landlord cannot exercise his rights under the forfeiture clause unless he has first served a notice under section 146 of the Law of Property Act 1925. The purpose of this is to give the tenant the opportunity to remedy the breach.
The section 146 notice must:
- Specify the particular breach complained of.
- If the breach can be remedied, require the tenant to remedy it. As the majority of breaches are remediable the best approach is to require the breach to be remedied “if it is capable of remedy”.
- Give the tenant a reasonable period of time in which to remedy the breach; what is reasonable will depend upon the facts.
- Require the tenant to pay compensation in money for the breach, if the landlord requires this.
In addition, where the landlord is serving a section 146 notice in respect of breaches of the repairing covenants, and where the original lease was for a term of 7 years or more and more than 3 years of the term are left unexpired at the date of service of the section 146 notice, the notice must comply with the requirements of the Leasehold Property (Repairs) Act 1938: it must be served on the tenant at least one month prior to issuing proceedings and it must state that the tenant has a right to serve a counter-notice within 28 days. If a counter notice is served the landlord cannot forfeit the lease without leave of the court.
If the breach is not remedied within the reasonable time specified, and there has been no waiver of the breach, the landlord can proceed to forfeit the lease by peaceable re-entry or by court proceedings. Note that even if the breach is incapable of remedy, the landlord should still wait a short time (eg 14 days).
It is important that, when a breach of covenant occurs, the landlord makes a decision to either determine the lease or allow it to continue. The landlord may lose his right to forfeit if he does any act which recognises the continuation of the tenancy after becoming aware of the breach. The law on this is complex and great care must be taken. The test of waiver is objective and the landlord’s intentions are immaterial: once the landlord has knowledge of the breach (including knowledge held by an employee of the landlord), and acts in a way which recognises that the lease continues, this constitutes waiver.
What acts amount to waiver?
Waiver requires a positive act on the part of the landlord. Acts of waiver include:
- Demanding or accepting rent/other sums. Note that acceptance of rent by a landlord’s agent will amount to a waiver, even if the agent has been instructed not to accept rent.
- Giving notice of intention to enter the premises to carry out repairs under a Jervis v Harris type clause.
- Sending in the bailiffs (exercising the Commercial Rent Arrears Recovery procedure).
- Granting any type of licence under the terms of the lease.
Once and for all or continuing breach
Waiver will only affect breaches that occurred prior to the act of waiver. If the breach re-occurs or continues, a new cause of action will arise to permit the landlord to make a new election of whether or not to forfeit. There is an important distinction between “once and for all” breaches and “continuing” breaches.
A “once and for all” breach occurs in respect of a covenant which requires an act to be carried out by a certain time (eg payment of rent) or which prohibits an act (eg unlawful alienation, insolvency, unauthorised alterations). Waiver of a once and for all breach will be fatal to the landlord’s right to forfeit. For example, if the tenant fails to pay his rent and the landlord subsequently demands the payment of service charge, the landlord will have lost his right to forfeit for that non-payment of rent. However, if the tenant fails to pay his rent again in the future this will be a fresh breach and the right to forfeit will arise again.
For a “continuing” breach, both the obligation and the breach are of a continuing nature (eg disrepair, failure to insure, wrongful use). In this case a landlord can still waive the breach but he will not lose his right to forfeit as the breach will effectively re-occur after the act of waiver. For example, where the property is in disrepair and the landlord demands payment of service charge, the landlord will have lost his right to forfeit when the demand is made, but the breach will re-occur the next day, and the landlord will still be able to forfeit.
The “act” of forfeiture – court proceedings or peaceable re-entry?
Peaceable re-entry is a self-help remedy which does not involve any court proceedings. It takes effect from the date of re-entry. Peaceable re-entry should not be used if any part of the premises is residential.
There must be some final and unequivocal act by the landlord to constitute re-entry, accompanied by an intention to forfeit. He need not evict the tenant – he simply has to re-enter. This is normally achieved by changing the locks so as to exclude the tenant.
The act of re-entry must be without violence; if there is someone on the premises who is opposed to the entry, great care must be taken. In practice most re-entries takes place either in the middle of the night or in the early morning, as it is wise to only re-enter when the premises are unoccupied. If violence is found to have been used there may be criminal liability. Due to the potential pitfalls, we would always recommend that a landlord instructs certified bailiffs who have experience of effecting peaceable re-entry.
Where forfeiture occurs by the issue of court proceedings, the lease is forfeit on the date of service of the proceedings, as the subsequent order for possession has retrospective effect to the date of service. In straightforward proceedings a court hearing should follow within 7 to 12 weeks depending on the courts schedule.
Relief from forfeiture
Where the landlord has forfeit by the issue of court proceedings the tenant (and also any affected subtenant or mortgagee) may apply, as part of their Counterclaim, for relief pursuant to s146(2) of the Law of Property Act 1925. Relief from forfeiture for non-payment of rent will automatically be granted if the tenant pays all of the arrears (including mesne profits due since the court proceedings were issued) and costs of the action not less than 5 clear days before the hearing. If this is not done, the court will make an order for possession to take effect not less than 4 weeks from the date of the order, unless the tenant pays into court all arrears and costs by that date. If the tenant does not qualify for this automatic relief and possession is granted he may still apply for relief within 6 months of the landlord obtaining possession.
Where the landlord has forfeit by peaceable re-entry, the tenant must make an application to court without “undue delay” and generally within 6 months. The court has discretion as to whether to grant relief, on such terms as it thinks fit, including costs, expenses and damages. It will usually grant the tenant relief where the breach has already been remedied, or will grant relief conditional upon the tenant remedying within a specific time. The tenant will ordinarily be responsible for the costs of the proceedings.
If relief is granted it is as if the lease had never been forfeit, which means that any subleases are also revived.
A subtenant is able to apply for relief in his own right, on a similar basis to the tenant. The court may either order that the tenant’s lease vests in the subtenant (though in practice this takes effect as the grant of a new lease) or, more usually, that a new lease is granted to the subtenant on such terms as the court sees fit. Whichever approach is used, any other sub-interests will not be reinstated.
Dealing with the property following forfeiture
After the lease has been forfeit a landlord will usually want to do something else with the property as soon as possible – he may wish to re-let it or he may have a seller ready to buy with vacant possession. The property may be in disrepair and need costly works before it can be marketed and there may be significant sums outstanding from the tenant (unpaid rent, service charge and insurance premiums). The following paragraphs look at some of the issues that commonly arise once forfeiture has taken place.
Can the landlord recover outstanding sums due?
There may be outstanding sums due from the tenant and repair works that need to be done: can the landlord claim these amounts? While a landlord needs to be careful about demanding sums due prior to forfeiting the lease (as this may amount to a waiver) he does not lose his right to claim these amounts after the lease has come to an end. All sums that were due as at the date of forfeiture remain due, including the full quarter’s unapportioned rent (unless the lease provides otherwise). The landlord is also able to claim for dilapidations, to cover the cost of putting the property back into repair.
How successful the landlord’s claims are likely to be will depend on the financial position of the tenant: if the lease has been forfeit because the tenant did not pay its rent it may be that the tenant is insolvent and unable to pay.
Can the landlord get rid of the tenant’s possessions?
The landlord has the property back but it’s likely to be full of the tenant’s possessions. What can the landlord do with these items? The answer is that it depends on the nature of the possessions.
Items which the tenant brings onto the premises may be a landlord’s fixture, a tenant’s fixture or a chattel. The general principle (which can be modified by agreement, so always check the lease) is that a tenant cannot remove the landlord’s fixtures at the end of the term. He has the option of removing tenant’s fixtures before the term comes to an end and he must remove chattels.
Something brought onto the premises by the tenant will become a landlord’s fixture if its removal would cause substantial damage to the premises or to the fixture itself; as soon as an item becomes a landlord’s fixture it belongs to the landlord rather than the tenant and the tenant cannot remove it.
Tenant’s fixtures are items attached to the land by the tenant for the purposes of its trade or business and which are capable of physical removal without causing substantial damage to the land and without the item losing its essential utility as a result of the removal. As soon as the lease is forfeit any tenant’s fixtures that remain will become a part of the land and, therefore, the property of the landlord and the tenant will lose its right to remove them. However, if the tenant is granted relief from forfeiture these tenant’s fixtures will revert back to the tenant for the remainder of the term.
Chattels are items which have not been affixed to the land or which are so loosely fixed as not to be regarded as fixtures. They continue to belong to the tenant even after the lease comes to an end and the tenant should always be given an opportunity to come and collect them. If chattels remain on the premises following forfeiture they remain the tenant’s property and the landlord has certain obligations, including not to deliberately or recklessly damage or destroy them. The lease may contain express wording about what the landlord will do with any goods left at the end of the term. However, in the absence of this the landlord needs to follow a notice procedure in order to try and return them, before selling the goods, deducting his expenses and accounting to the tenant for the balance.
Can the landlord re-let or sell the property immediately?
A landlord who decides to forfeit a tenant’s lease will often do so because he wants to get the property back for some reason: he may have a new tenant ready to take a lease or he may be hoping to sell it with vacant possession. The question is how the landlord’s right to deal with his property ties in with the tenant’s right to apply for relief. As we have seen, if the tenant is granted relief the lease will be reinstated, so must the landlord wait for six months before he can do anything else with the property?
There is no simple answer to this question. As the grant of relief is discretionary, the court will consider whether any third party interests have been created since the forfeiture took place, how quickly the landlord acted in granting these, whether the third party knew of the risk that an application might be made and whether the tenant delayed in making its application for relief: the landlord’s right to deal with its own property will be balanced against the tenant’s right to relief.
If the landlord grants a new lease and relief from forfeiture is then granted, the original lease will be reinstated. This means that the new tenant’s interest will be subject to the original lease. If the new tenant is unaware of the risk that relief from forfeiture may be granted he will have a damages claim against the landlord as he will no longer have a right to occupy the property (though he will have the right to receive rent from the original tenant). The same applies where the landlord sells his interest in the property: the new owner will become the landlord of the reinstated lease and, depending on the terms of the sale, may have a damages claim against the seller.
From a practical perspective there are several things that a landlord can do to minimise the risks. He should give written notification to the tenant (and others with a right to apply) that he intends to grant a new lease/sell the property and ask that they apply immediately if they intend to do so. While this won’t prevent them making a later application, it will be a point in the landlord’s favour when the court exercises its discretion. To avoid a damages claim the landlord should be completely open with the new tenant/buyer. They should be alerted to the fact that the former tenant has a right to apply for relief, and it should be made clear that they take subject to any such interest. Where the new tenant/buyer doesn’t want to become subject to the original lease it may be appropriate to enter into an agreement for lease or sale conditional upon relief not having been granted by a certain date (but allowing immediate occupation under the terms of this agreement), or to grant a lease with a tenant’s break in the event that relief is obtained.