Many businesses opt to rent commercial premises rather than buy outright. Renting allows you to allocate the money you would have spent on premises to other business areas, gives you the flexibility to relocate if you expand, and negates the risk of losing money if property values drop. However, since you do not own the premises, you are at risk of being forced to leave if your Landlord exercises their right of forfeiture. The impact of forfeiture on your business can be catastrophic. You will be forced to close the premises, sacrifice the goodwill attached to them and cease trading until you can secure a new property.
In this guide, our commercial property dispute solicitors explain the rights and remedies available to commercial tenants faced with forfeiture. We have based the information on the procedure, criteria and time limits relevant to the County Court, being the Court where most relief from forfeiture cases are brought. The procedure in the High Court is largely the same, but our property disputes solicitors will advise you of any differences and their potential impact on your case, should it be necessary.
Contents:
- What is forfeiture?
- What is relief from forfeiture?
- When can a tenant apply for relief from forfeiture?
- Section 146 Notice
- Forfeiture for non-payment of rent
- Forfeiture for non-payment of rent through Court proceedings
- Forfeiture for non-payment of rent through peaceable re-entry
- Is there a forfeiture clause in your lease agreement?
- On what grounds can a tenant apply for relief from forfeiture?
- How to apply for relief from forfeiture
- Is there a time limit for relief from forfeiture?
- Has the landlord lost the right to forfeit?
- What if the forfeiture has been done wrongly?
- Summary
What is forfeiture?
Forfeiture is a landlord’s ultimate weapon when a tenant breaches the lease. It allows them to end the tenancy and take back control of the premises. The right must be expressly conferred by the lease and is usually dependent on specified circumstances such as the tenant being in breach of its obligations under the lease such as not paying rent on time or not keeping the premises in repair. The majority of modern commercial leases grant the landlord a right to forfeit a lease.
Forfeiture can be affected in one of two ways, namely peaceable re-entry or Court proceedings. Peaceable re-entry involves the landlord re-entering the premises and taking back possession, usually by changing the locks. It is cheaper and quicker than Court proceedings and would often be used if the forfeiture was based on non-payment of rent. However, proceedings pose less risk for a landlord and are usually more appropriate in cases involving a dispute, for example, allegations of breach of repairing obligations or tenant alterations having been made without permission.
Most landlords do not exercise their right of forfeiture lightly since they risk being left with vacant premises and a loss of rental income until a new tenant can be secured. In addition, the right to forfeit can be waived inadvertently; by the landlord demanding or accepting rental payments, for instance.
What is relief from forfeiture?
The law recognises that forfeiture is a powerful remedy and is mindful of the severe impact it can have. Accordingly, commercial tenants can apply to the Court for relief from forfeiture in certain circumstances. Generally speaking, if a tenant acts promptly, takes steps to remedy the matters leading to the forfeiture and pays the landlord’s costs, their application will likely succeed. However, strict time limits apply, and the Court will often take into account the parties’ general conduct when making their decision. It is, therefore, advisable to seek help from experienced property dispute solicitors when making the required application to maximise your chances of success.
When relief from forfeiture is granted, the parties return to the position they were in before the forfeiture occurred ie the lease which was brought to an end is effectively reinstated as if the forfeiture had never occurred
When can a tenant apply for relief from forfeiture?
A tenant can apply for relief from forfeiture as soon as the landlord exercises the right to forfeit. This can be by serving a section 146 notice (see below), issuing court proceedings or through peaceable re-entry.
Section 146 Notice
A landlord must serve a Notice under section 146 of the Law of Property Act on their tenant if they wish to exercise their right of forfeiture for any breach of covenant save for a failure to pay rent. The breaches to which such a Notice applies include subletting the premises without consent or making unapproved alterations.
The Section 146 Notice must state the nature of the tenant’s breach and, if it is capable of remedy, allow a reasonable time within which to do so. Since every scenario is unique, what will be deemed a ‘reasonable’ time depends on the circumstances of the breach. It would usually take longer to remedy a failure to repair, for example, than it would to arrange insurance coverage. If the tenant fails to remedy the breach within a ‘reasonable’ time, the landlord can proceed with forfeiture, and the tenant can apply for relief in the usual way. For example, if required repairs were detailed, then the notice may give as long as 6 months for compliance, whereas something simpler might be as short as 7 days.
If you are faced with a Section 146 Notice requiring you to remedy a breach within a specified or ‘reasonable’ period, speak to us as soon as possible. Our experienced property disputes solicitors have an in-depth understanding of the relevant case law relating to what the Court considers a ‘reasonable’ timeframe, and extensive practical experience in dealing with Section 146 Notices. They will review the Notice in the context of your situation and advise accordingly.
Forfeiture for non-payment of rent
In the case of unpaid rent, the landlord does not need to serve a Section 146 Notice before exercising their right of forfeiture. Most modern commercial leases will afford the landlord a right of forfeiture if the rent remains unpaid for a specified number of days – frequently if rent is unpaid for 21 days or more
Forfeiture for non-payment of rent through Court proceedings
If the landlord exercises their right of forfeiture by issuing Court proceedings, the tenant has an automatic right to relief provided they pay all arrears, interest and the landlord’s legal costs by no later than five clear days before the hearing.
If a tenant fails to obtain automatic relief at their first opportunity, the Court will agree to the landlord re-entering the premises at a specified future date. In the meantime, the tenant has a further automatic entitlement to relief if they pay all arrears, interest and the landlord’s legal costs by the re-entry date.
If the tenant does not obtain automatic relief at the second opportunity, they have a right to apply for relief within six months of the landlord taking back possession of the premises. In these circumstances, the Court will usually grant the relief sought if the tenant has cleared the arrears, paid the interest and the landlord’s legal costs, and the Court is satisfied that they will not breach the terms of the lease going forward.
Forfeiture for non-payment of rent through peaceable re-entry
Where a landlord has proceeded with forfeiture through peaceable re-entry, the tenant will have already lost possession of the premises. In these cases, the need to act quickly can be even more compelling. The first time that a tenant becomes aware of this is likely to be when it turns up to open the premises on a business morning to find that the locks have been changed and there is notice to that effect.
The Court’s powers in granting relief from forfeiture in peaceable re-entry cases are discretionary. The Judge will consider all relevant facts, including the parties’ conduct, when making their decision.
In cases involving non-payment of rent, an application must be made within six months of the landlord regaining control of the premises. However, the overarching principle is that the tenant must act promptly. In some cases, any unexplained delay may cause the application to fail, even if it was made within six months. Accordingly, you must take legal advice as soon as your landlord exercises their right to forfeiture through peaceable re-entry, since any delay may severely prejudice your position.
Is there a forfeiture clause in your lease agreement?
A landlord’s right of forfeiture does not arise automatically and must be expressly granted by the lease. The first port of call in any forfeiture clause will, therefore, be the lease documentation.
However, a landlord may have an implied right of forfeiture in cases where the tenant has breached a condition of the lease. Our commercial property solicitors will advise whether there might be an implied right of forfeiture.
On what grounds can a tenant apply for relief from forfeiture?
There are no prescribed grounds on which a tenant can apply for relief from forfeiture; the relief is at the discretion of the Court.
Factors that the Court will consider include the nature and wilfulness of the breach, how long the lease has left to run, the promptness of the tenant’s application for relief and the parties’ general conduct.
While the merits of any application will hinge on the facts of the case, there is an extensive body of case law relating to relief from forfeiture which provides some guidance on the likelihood of an application succeeding. Our property disputes solicitors will consider the circumstances of your situation alongside the relevant case law and advise on your likely chances of success.
How to apply for relief from forfeiture
An application for relief from forfeiture can be made by way of counterclaim in a defence against the landlord’s claim for forfeiture, or by issuing a separate claim. The appropriate method will depend on the circumstances of the case.
It is important to note that once a landlord has exercised their right of forfeiture, the lease is brought to an end and can only be resurrected by the Court; the parties cannot subsequently agree the relief between themselves. If they purport to do so, they will be entering into a new tenancy. This can have unexpected consequences, such as any security attached to the original lease being lost.
So, even if the landlord is amenable to the relief, the tenant must still make the necessary Court application. The parties can subsequently agree and file a Consent Order, thus circumventing any lengthy delays and Court hearings. As soon as the Court approves the Order, the tenant can return to the premises on the terms of the old lease. In the meantime, the parties may agree to the tenant returning under a licence.
Is there a time limit for relief from forfeiture?
The time limits for relief from forfeiture vary depending on the nature of the breach and method of forfeiture used by the landlord.
Generally speaking, the time limits are as follows:
For breaches other than non-payment of rent:
Forfeiture by Court proceedings
The tenant can apply for relief at any time until the landlord has taken possession of the premises.
Forfeiture by peaceable re- entry
The tenant can, strictly speaking, apply for relief at any time, although a time limit of six months is generally accepted.
For non-payment of rent
Forfeiture by Court proceedings
The tenant is entitled to automatic relief from forfeiture without having to make an application, provided the criteria mentioned above – namely the payment of all arrears, interest and costs – is made by five days before the forfeiture hearing.
If the tenant has not obtained automatic relief, they may apply for relief within six months of the landlord re-entering the premises.
Forfeiture by peaceable re- entry
The tenant must apply for relief within six months of the landlord re-entering the premises.
Notwithstanding the general time limits mentioned above, it is crucial to act quickly when contemplating an application for relief from forfeiture. In some situations, an unexplained delay may result in the Court refusing the application, even when made within six months.
Has the landlord lost the right to forfeit?
Whilst the right of forfeiture is a landlord’s most powerful tool, it can be easily lost if the landlord does anything that could be construed as accepting that the lease continued after the breach. This includes accepting or demanding rental payments.
Our property disputes solicitors will review the evidence and circumstances of the forfeiture and advise whether there is scope to argue that the landlord has lost their right to forfeit by treating the lease as continuing.
What if the forfeiture has been done wrongly?
If the landlord purports to exercise their right to forfeit in circumstances where they were not entitled to do so – either pursuant to the terms of the lease, or because they had waived it – their conduct may amount to ‘wrongful forfeiture’.
In cases of wrongful forfeiture, the tenant may be entitled to the following relief:
- a declaration that the forfeiture was wrongful
- an injunction allowing them to re-enter the premises
- damages for trespass, any loss of profit suffered during the time they were unable to trade and the landlord’s breach of the covenant of quiet enjoyment.
In cases of wrongful forfeiture, it is not usually necessary to apply for relief from forfeiture since the lease was not forfeited. However, it may be sensible to make simultaneous applications to avoid delays in case the Court finds the forfeiture to be valid. Our commercial property dispute solicitors will advise on the best course of action in your case.
Summary
Forfeiture is a landlord’s ultimate remedy. It is unequivocal and final, and its consequences can be far reaching and severe. Expert legal advice is crucial and should be sought as soon as you become aware of any circumstance that may give rise to the right. Timely action is vital to either prevent the landlord from exercising the right or take all necessary steps to address them having done so. If early, decisive steps are taken to protect your position, the potentially catastrophic effects of a landlord’s right of forfeiture can be avoided or at least minimised.
