Circumstances may arise where a landlord wishes to evict its tenant, terminate a lease and regain access to the property. The concept of forfeiture provides the landlord with that opportunity in certain circumstances.
Forfeiture can be a risky action, so it is important for a landlord to proceed with care, having taken advice specific and appropriate to their circumstances from a commercial property solicitor.
In this article, we consider:
- What does forfeiture of a lease mean?
- Before forfeiting a lease
- Alternatives to forfeiting a lease
- Ways to forfeit a lease
- Forfeiting a lease for non-payment of rent
- Forfeiting a lease for breach of covenant
- Waiver of forfeiture in commercial leases
- Relief from forfeiture
- Illegal forfeiture and wrongful forfeiture
- Can a tenant forfeit a lease?
- After forfeiture of a lease
What does forfeiture of a lease mean?
Forfeiture of a lease is a process by which a landlord exercises a right to terminate a lease. This is also sometime referred to as ‘re-entry’.
A lease can be forfeited:
- Where the tenant has breached its obligations under a lease; and/or
- In specific circumstances which are expressly detailed in the lease (further details below).
Before forfeiting a lease
Before forfeiting a lease, a landlord should ask itself:
- Is the forfeiture appropriate in the circumstances?
- Is there a benefit to taking back possession?
- What is the market like (will the landlord be able to find a new tenant quickly?)
- Are there any guarantors or other forms of security (rent deposit) that can be called upon to address any arrears in rent, if this is the landlord’s concern?
- Can the property be secured – i.e. are there squatters or a risk of squatters entering the property if is vacant?
- Does the property need to be developed/would benefit from development?
Alternatives to forfeiting a lease
A landlord may consider the following alternatives to forfeiting a lease where the reason for potential forfeiture is non-payment of rent:
- Discussions with the tenant to try and resolve the issue.
- Calling in a form of security if in place (such as a rent deposit or guarantees).
- A ‘standard’ debt recovery claim in the county court.
- Serving a statutory demand. This is a formal notice which is a pre-curser to a winding up or bankruptcy petition. It can exert significant pressure on a recipient. This is because they will be required to either pay or challenge the demand within a very short period of time. A challenge will require evidence of a genuine dispute and/or that the landlord has sent the notice abusing the process. An unanswered statutory demand is, on the face of it, evidence of insolvency/bankruptcy which can be used against the tenant in a subsequent winding up or bankruptcy petition.
- Use of the commercial rent arrears recovery process.
Where the reason for potential forfeiture is an issue other than non-payment of rent, such as making alterations without consent, a landlord may consider:
- Negotiations with the tenant
- A claim in the county court (for some specified type of redress – this might be, for example an injunction or damages)
To help pursue negotiations a landlord may benefit from working with our team of alternative dispute resolution solicitors.
Ways to forfeit a lease
In general, a lease can be forfeited by a landlord by a process referred to as ‘peaceable re-entry’, or alternatively by obtaining an order from the court.
Peaceable re-entry, in short, is the act of regaining physical possession of the property. The term ‘peaceable’ is by reference to the person and not necessarily the property which is the subject of the lease. It follows, therefore, that a landlord may use some force (against the property) to exercise its right of re-entry. However, this force should not be excessive. Indeed, it is a criminal offence to use violence to gain re-entry if there is someone at the property and they object to the re-entry.
It is important for a landlord to ensure that, in regaining possession, its acts are unmistakeable. Commonly this will include precluding re-entry by the tenant (changing the locks) and blocking access to open areas to the extent possible.
Due to the difficulties from a practical perspective in securing re-entry as outlined above, it is normal in commercial property for this to take place outside business hours where it is more likely that the property will be empty.
A landlord may wish to instruct a certified bailiff to carry out re-entry on the landlord’s behalf.
Once re-entry has taken place, the landlord should ensure that a clear and visible notice is in place on the property. There is no specific form of notice provided under law, but it is sensible to include the following:
- A general statement indicating the tenant should take note that the landlord has forfeited the lease by re-entering the property.
- Reference to the relevant clause under the lease which authorises the landlord to forfeit.
- A statement that only those authorised by the landlord can lawfully enter the premises going forward and any such attempt otherwise will be a criminal offence.
- Full details of the property and contact details for the landlord or its agent.
Forfeiture by legal proceedings / a court order
If a landlord decides to start proceedings for forfeiture, although this is a clear statement of the landlord’s intentions to regain the property, the lease will only terminate when the court makes an order for possession (if it does), albeit it will apply retroactively.
The civil procedure rules set out specific procedures for applying to court for a forfeiture order. The procedures vary depending on whether the property is a commercial or residential property.
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Forfeiting a lease for non-payment of rent
Ordinarily, a right of forfeiture may only be exercised if it is expressly provided for within the lease. The exception to this is that the landlord may have ‘implied’ right where the tenant has breached a condition (a fundamental requirement of the contract). Principally this includes a non-payment of rent, assuming that payment of rent is a condition of the lease (which would normally be the case).
Forfeiture of a lease for non-payment of rent can be affected in the normal way (by peaceful re-entry or a court order).
A landlord should be aware that:
- If rent is accepted despite the landlord knowing that there has been a breach of the lease, the landlord is likely to be deemed to have accepted that breach and given up its right to forfeiture (known as ‘waiving’ its right).
- A landlord may wish to refuse to accept rent, to avoid waiving its right to forfeit. However, if the grounds for forfeiture are non-payment of rent, it will practically be hard for the landlord to resist. This is because a tenant has an opportunity to claim relief from forfeiture and payment of arrears is a key factor in supporting such a claim.
If a tenant is struggling with cashflow, an alternative may be for the landlord to consider a concession arrangement allowing the tenant to make commercial lease payments monthly, instead of quarterly.
Forfeiting a lease for breach of covenant
A covenant is a term given to obligations within an agreement, and under a lease are normally given by a tenant.
In order for landlord to forfeit a lease based on a breach of covenant, the lease must specifically say that the landlord has such a right attaching to a breach of that covenant.
Waiver of forfeiture in commercial leases
A landlord should be cautious not to do anything that might be deemed a waiver of rights where it is considering forfeiture. A waiver will exist where the landlord:
- acts in a way which clearly acknowledges that the lease continues to exist;
- has knowledge of the tenant’s breach; and
- makes the tenant aware of the continuation of the lease.
To limit risk, a landlord should take forfeiture action at the earliest opportunity.
A tenant will be required to show (to a court) that the landlord had knowledge of the breach and will need to provide evidence of this.
As noted above, in particular, accepting rent is a clear act of acknowledging the continuation of the lease and making the tenant aware of this.
Relief from forfeiture
A tenant may be able to ask a court to provide it with relief from forfeiture (i.e. stop it from happening) and the court has the discretion to award this. An application may be made by a tenant immediately after the landlord has asserted forfeiture.
If relief is granted, the court will attempt to put the tenant back into the position it would have been in, had there not been forfeiture.
In exercising its discretion, the court will consider:
- has the tenant acted wilfully (in potentially breaching its obligations)
- has there been any delay in making an application for relief (and in the meantime, has the landlord granted new leases to other parties in respect of the property)
- the proportionality of the damage and advantages to the respective parties
- the financial position of the tenant
- whether the tenant has paid any rent arrears
- whether there has been a waiver
Illegal forfeiture and wrongful forfeiture
It is possible for a tenant to present a claim for wrongful or illegal forfeiture. This may occur where the landlord attempts to forfeit, but no such right actually exists (yet or at all).
In bringing such a claim a tenant may seek an injunction to permit the tenant back into occupation and, also, a payment for any losses suffered.
Can a tenant forfeit a lease?
Forfeiture is a term which relates specifically to a landlord’s right to recover possession of the property. The tenant may, however, have certain rights to terminate a lease (for example, break clauses, termination on insolvency or under statute).
After forfeiture of a lease
A landlord should consider the following after a lease has been forfeited:
- Ongoing responsibility to pay rates.
- What is the status of any fixtures in the property or other assets within the property (ownership of fixtures may vary depending on whether the landlord has peaceably re-entered or if a court order has been granted).
- Does the lease need to be removed from any Land Registry entries?
- Are there any other claims which the landlord may wish to bring against the tenant (for example relating to dilapidations or environmental issues).