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
- How long does the process of forfeiting a commercial lease typically take?
- Is there a notice period required before forfeiting a commercial lease?
- Ways to forfeit a lease
- What are the common mistakes landlords make during forfeiture?
- How does the forfeiture of a commercial lease impact subtenants?
- Illegal forfeiture and wrongful forfeiture
- Can a tenant forfeit a lease?
- Relief from forfeiture
- After forfeiture of a lease
- Alternatives to forfeiting a lease
- Summary
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?
How long does the process of forfeiting a commercial lease typically take?
This often depends on the reason for eviction, and whether the forfeiture is contested or disputed. For straightforward cases where the tenant is in clear breach of the lease for non-payment of rent and notice is not required, the process has been known to take as little as a few days. Where serving formal notice is required, the tenant seeks relief from forfeiture, and court proceedings ensue – it may take several months.
Is there a notice period required before forfeiting a commercial lease?
If the breach relates to non-payment of rent, the landlord is under no obligation to give notice to forfeit the lease.
The situation is different for breach of other covenants under the lease by the tenant. The landlord must follow the correct statutory procedure, serving formal notice (known as a section 146 notice) on the tenant. The notice should specify details of the breach and allow a reasonable timeframe to rectify it (or provide monetary compensation). The notice itself must be served by the specific notice provisions outlined in the lease. If the tenant then fails to remedy the breach, the landlord can peaceably re-enter the property and forfeit the lease.
Ways to forfeit a lease
A lease can be forfeited by a landlord by a process referred to as ‘peaceable re-entry’, or by obtaining an order from the court.
Peaceable re-entry
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. A landlord may use some force (against the property) to exercise its right of re-entry. This force should not be excessive. 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.
A landlord needs to ensure that, in regaining possession, its acts are unmistakable. 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
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 an ‘implied’ right where the tenant has breached a condition (a fundamental requirement of the contract). 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. 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 cash flow, 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.
Forfeiture due to tenant insolvency
Most modern day leases provide that the landlord can forfeit the lease in the event of the tenant’s insolvency. The type of insolvency the tenant has entered has a direct impact on how a landlord can proceed. There are four main categories of company insolvency:
- Administration
- Company voluntary arrangements
- Receivership
- Winding up (compulsory or voluntary)
If a tenant company goes into administration, there is a complete stay of proceedings against the company while the administrator tries to rescue or realise assets for creditors. Landlords must seek permission from the court before commencing forfeiture proceedings in the event of a tenant company going into administration.
Forfeiture is available in cases of company voluntary arrangements, the landlords should refer to the terms of the arrangement before taking action.
In cases of receivership, and voluntary winding up - the landlord can effect forfeiture by peaceable re-entry or applying to the court. If a tenant company is subject to compulsory winding up, the Landlord must effect forfeiture before the winding up order is issued, otherwise he would need the court’s permission.
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 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.
Accepting rent is a clear act of acknowledging the continuation of the lease and making the tenant aware of this.
What are the common mistakes landlords make during forfeiture?
Failing to check the lease: The lease must contain an express forfeiture clause to enable a landlord to forfeit the lease (it is not implied). The clause will also need to cover the alleged breach. Taking steps to forfeit the lease without checking that it contains the relevant clause can land landlords in trouble.
Not following the correct procedure: In the case of breach of covenant other than non-payment of rent, landlords must serve notice and allow a reasonable time for the tenant to remedy any breaches capable of remedy. Failing to provide notice in the first instance, or providing notice demanding an unrealistic timeframe to remedy the breach can cause issues for a landlord. Even where the breach seems incapable of remedy, notice must still be served. The notice must be given in the specific form set out in section 146 of the Law of Property Act 1925.
Recognising the continued existence of the lease: Many landlords unknowingly waive their right to reclaim possession of the property by acknowledging the continuity of the lease. This is more of a problem in what is known as ‘once and for all’ type breaches, which can be distinguished from a ‘continuing breach’. In the case of a continuing breach, a new right to forfeit the lease arises with each passing day the breach continues. A good example of this is where the tenant has failed to repair the property or keep it in good repair in accordance with their obligations under the lease. If the landlord is deemed to have waived the right to forfeit a once and for all type breach, such as the unlawful assignment or subletting of the lease, they will not be entitled to claim forfeiture unless and until the tenant breaches the terms of the lease again.
Failing to consider alternatives or financial implications: As tempting as it may be to reclaim your property from a breaching tenant, some landlords may overlook other options such as mediation or negotiation with the tenant, which can lead to a more amicable resolution. Landlords should also take into account the cost of legal proceedings, and potentially paying business rates on an empty property if the market is tough or in finding a suitable replacement. If the tenant has a claim for wrongful/illegal forfeiture (see below), the landlord may also be exposed to paying damages for loss of use of the premises, which can be substantial.
How does the forfeiture of a commercial lease impact subtenants?
When a commercial lease is forfeited, any subtenant's right to occupy the premises is also terminated. This may seem unfair to a subtenant who then loses the premises through no fault of their own. There are certain protections in place for subtenants – the law allows subtenants to apply for relief of forfeiture (even where the tenant does not), provided they do so within six months of the date of the landlord taking possession. The court has wide discretion here and may allow the subtenant to take over the headlease (the first least between the landlord and the defaulting forfeited tenant).
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 have certain rights to terminate a lease (for example, break clauses, termination on insolvency or under statute).
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
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).
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.
Summary
Forfeiting a lease is considered to be a draconian step taken by the landlord to regain possession of the property and should be exercised carefully. While most modern-day leases contain forfeiture clauses, landlords should consult the terms of the lease at the earliest opportunity before moving forward. It is essential that formal notice procedures, if applicable, are complied with. Landlords should also be careful that they do not accidentally waive their right to forfeit by recognising the continued existence of the lease. Where a landlord successfully re-enters the property, the tenant may still apply to the court for relief of forfeiture.
If you are facing a situation where your commercial lease may be forfeited or if you are considering forfeiting a commercial lease, speak to our friendly commercial property team today to understand your rights and obligations.
