Raising the Roof – Forfeiture of a Commercial Lease | Litigation
Imagine you are a tenant of a commercial property. Business may be slow and you have fallen behind on your rent, but you know things will eventually pick up and you will settle your arrears. You leave the premises unattended for a period of time to try and find a way to remedy the situation, only to return and find your landlord has changed the locks and effectively evicted you from your livelihood. Surely they cannot take such drastic action against rent arrears, can they?
Or perhaps you are a commercial landlord and you have discovered that your tenant has made alterations to the property that specifically breach covenants set out in the tenancy agreement. They may pay their rent on time but you are incensed at the lack of respect they appear to have for the contract between you and want rid of them before they take any further liberties. Can you remove them from your property before the lease expires, or are you stuck with them?
The answer to both questions is yes. However, the process is far from simple as you will soon see. Keep reading and I will try to explain the complex issue of forfeiture to you.
Let’s start with a definition.
Forfeiture of a Commercial Lease
In plain language, forfeiture can be defined as ending a tenancy before the term of the lease expires. A landlord can forfeit the lease because their tenant has breached either a covenant expressed in the lease contract (such as sub-letting the property when it has been expressly forbidden to do so) or a condition that goes to the heart of a landlord and tenant relationship (such as failure to pay rent).
To forfeit a lease for a breach of covenant, the covenant in question must be expressed in the lease agreement.
There are two ways a lease can be forfeited; by peaceable re-entry or via court proceedings. But before deciding to take this rather drastic step, a landlord should consider the following:
- The market situation. How easy will it be to find another tenant for the property?
- If the tenant is only a month or two behind in payments, or has been exemplary in every way apart from a breach of a single covenant, can the situation be resolved by negotiation? After all, it is far easier to keep a good tenant than find a good tenant.
- The loss of rental income, which in a depressed market, could go on for some time. If the property is vacant for a long period then the landlord will also be responsible for council tax, utilities payments and water rates, as well as business rates in certain circumstances.
- The costs involved in re-furnishing the property for re-letting.
- If a landlord forfeits the lease wrongly they may be found guilty of trespass and/or breaching the covenant of quite enjoyment, and may be forced to pay compensation to the tenant.
Virtually all commercial leases have a clause which will entitle the landlord to re-enter the property, re-take possession and change the locks in the case of rent arrears. If you decide to enact this clause in your lease you will need to place a prominent notice on the property (for example on a window) alerting the public (and hopefully the tenant) that a forfeiture has taken place.
It is important to note that you cannot force your way into the premises and take it over. If you do so you will be committing a criminal offence. Most peaceable re-entries take place outside working hours to ensure no one is in the property. Ideally this method should be reserved for situations where the tenant has been absent from the property for some time and has neglected to pay rent or other bills.
Advantages of the peaceable re-entry method
- It is a quick, efficient way of dealing with a tenant who appears to have absconded and left outstanding rent payments (as well as other bills).
- A landlord can re-let the property quickly to minimise your losses.
- If the re-entry is done correctly there will be no court costs to pay.
Invest in employing professional bailiffs to perform the re-entry for you. Then you can be assured that the proper notices are put up and the letter of the law is followed.
The Tenant’s Property
The landlord will become an ‘involuntary bailee’ for any stock left in the premises by the former tenant. In accordance with Schedule 1 of the Torts (Interference with Goods) Act 1977, the landlord needs to serve their former tenant notice requiring them to come and collect the goods. If the former tenant’s address is unknown then a prominent notice must be displayed on the premises. The goods can be sold by the landlord after a certain period if no action is taken by the tenant and it becomes clear that they have abandoned the goods.
The case of Re Palmiero , established that the tenant’s right to remove fixtures is lost when forfeiture is conducted by peaceable re-entry.
The safest route for a landlord to take when gaining repossession of their property is to instigate proper court proceedings by serving what is commonly called a Section 146 Notice (this is the only way to forfeit a lease for all breaches of covenants other than just non-payment of rent). The notice must set out the nature of the breach, whether the breach can be remedied, instruct the tenant that the remedy must be carried out, and any demands for compensation.
If the breach is considered irremediable then the landlord can forfeit the lease straight away. The test as to whether a breach of covenant is remedial or irremediable was set out in the case of Expert Clothing Service and Sales Ltd v Hillgate House Ltd . In this case it was deemed that the test was; if the tenant was allowed a reasonable amount of time to remedy the breach and pay appropriate compensation, would this effectively remedy the harm suffered by the landlord? Typically, breaches such as illegal or immoral use of the property and unauthorised subletting are seen as irremediable, whereas the non-payment of rent or unauthorised alterations are judged to be remediable.
If you are a landlord and your head is starting to spin a little at this point, I have some bad news for you. Under the Leasehold Property (Repairs) Act 1938, if the lease was granted for a period of seven years or more and has more than three years left to run, the tenant may serve a counter-notice on the landlord’s Section 146 Notice, which in practical terms, makes it nearly impossible to forfeit the lease.
If the court grants a possession order, then the tenant will have 28 days in which to vacate the premises. They will have the right to remove any fixtures.
Tenant’s Right to Relief
What about the tenant? Can they undo or stop the eviction?
Under s146 of the Law of Property Act 1925, a tenant may apply to the court for relief from forfeiture. This applies to both peaceable re-entry and court ordered repossession by the landlord. If the tenant has acted promptly and remedied the situation which led to the forfeiture (for example paid all the rent arrears in full) then relief will generally be granted, however, it is up to the court’s discretion in each particular case.
The tenant would normally be liable to pay all the court costs, even if the landlord has requested that relief is sought through the courts (Zestcrest Ltd v County Hall Green Ventures Ltd )
If you are a landlord, bear in mind that if you are aware that a covenant has been breached and you continue to ask for and accept rent and appear to carry on as normal you may waive your right to forfeiture, especially if it is a one-off breach such as sub-letting. If you want to enact your right to forfeit, make sure you alert your tenant to the breach of condition or covenant as soon as you become aware of it and do not ask for nor accept any rent.
Does all this sound confusing and full of legal jargon? That’s because, unfortunately, it is. The Law Commission has recognised that the law of forfeiture is complicated, archaic, can result in unfairness to both the landlord and tenant, and needs updating. In 2006 after a lengthy consultation process it released a paper suggesting that the current law should be replaced by a statutory scheme. Two of the changes suggested by the Law Commission were;
a) abolishing a landlord’s right to peaceable re-entry; and
b) removing the distinction between remedial and irremediable breaches of covenant.
The Government is now considering the report and will decide in due course if any changes to the present law will be made.
Have you experienced a situation involving forfeiture of a commercial lease? We would like to hear about your experience, please feel free to comment below.
To explore the topic of forfeiture further please click here, or you can phone our offices and talk to one of our commercial litigation specialists.