Forfeiture: a guide for tenants

As a commercial tenant, what can you do if your lease has been forfeited? How can you determine if the forfeiture is lawful? And, importantly, how can you prevent the situation from arising in the first place?

Kyle Wyness, partner in Lodders’ property dispute resolution team, provides a guide to forfeiture from a tenants’ perspective. For more information on the right to forfeit from a landlord’s perspective, please click here.

The primary advice for tenants is to comply diligently with the terms of the lease wherever possible. However, sometimes unexpected circumstances arise, which can uproot even the best laid plans.

If you are a tenant and you find yourself facing forfeiture, all is not necessarily lost. Where a lease is being forfeited, tenants can apply for “relief from forfeiture.”

Is the forfeiture lawful?

Before reaching the point of applying for relief, there are several questions tenants should consider to help establish whether the forfeiture itself is lawful, including:

• Is a right to forfeit included in the lease?
• Has a forfeiture event actually arisen?
• Has the landlord exercised the right to forfeit in accordance with the lease?
• In the case of breaches of covenant (other than for non-payment of rent), has the landlord served a Section 146 notice?
• Is the Section 146 notice valid?
• Has the landlord waived the right to forfeit by recognising the existence of the lease?
• If so, is the waiver of the right to forfeit in respect of a “once and for all” or “continuing” breach of covenant?

Is the Section 146 notice valid?

To be considered valid, a Section 146 notice must clearly specify the breaches of covenant. If the notice refers to the wrong covenant, it will be deemed invalid.

This was starkly demonstrated in the case of Akici v LR Butlin Limited [2005], where the Judge found that the tenant had shared possession of the property and that this represented a breach in the lease. However, the Section 146 notice served by the landlord did not allege that the tenant was sharing possession, but that it has “parted with possession”, and was therefore deemed invalid. The re-entry of the property was consequently deemed unlawful, and the landlord’s actions amounted to trespass.

In these circumstances, the landlord would likely to be liable for damages – including damages for loss of business – as well as legal costs.

What is relief from forfeiture?

Forfeiture relief is what is known as an “equitable remedy”. This means it is awarded at the discretion of the Court, based on notions of fairness and justice.

The relief allows the tenant to remain in or recover possession of the property and, if granted, restores the original lease as though it was never forfeited in the first place.

Only the Court has the ability to resurrect the lease, and so the application for relief has to be made from the tenant to the Court. If a landlord and tenant try to agree relief between themselves without obtaining a Court order, a new tenancy would be created rather than the original one reinstated. This may have undesirable consequences for the landlord, so is typically discouraged.

A tenant should make an application for forfeiture relief as soon as the landlord proceeds with the forfeiture. The application can be made either as a counterclaim or in a standalone claim form lodged by the tenant.

Relief from forfeiture for non-payment of rent?

When forfeiture has been effected based on rental arrears, the rules are set out in Section 138-140 of the County Courts Act 1984, which states that the tenant has a right to automatic relief.

There are three opportunities for the tenant to obtain this relief:

1. The tenant must pay all rent arrears, interest, and costs of the action to the landlord or into court not less than five clear days before the first hearing of the landlord’s forfeiture proceedings. If this is done, the landlord’s forfeiture claim ends, and the lease is reinstated.
2. If the tenant does not obtain relief at the first opportunity and the Court decides at the first hearing that the landlord is entitled to possession:

• The Court will order possession at a future date, usually at least four weeks after the first hearing.
• The tenant will have another opportunity to obtain relief by paying all arrears, interest, and costs by the possession date.

3. If the tenant does not obtain relief at the second opportunity and does not comply with the court order, the tenant has another opportunity to apply for relief. This application must be made within six months of the landlord recovering possession. The Court will usually grant relief if the tenant pays all arrears, interest, and costs and is satisfied that the tenant will pay rent and comply with the lease terms in the future.

In cases of forfeiture by peaceable re-entry, the tenant can apply for relief within six months of re-entry. To be successful, the tenant must first pay any arrears and the landlord’s costs.

Relief from forfeiture for breach of other covenants

The Court’s power to grant relief from forfeiture for breach of other covenants stems from Section 146(2) of the Law of Property Act 1925.

Generally, the Court will grant relief if the breach is remedied or compensation is paid when the breach cannot be remedied, and it is persuaded that the tenant will comply with future lease obligations.

The Court has wide discretion to grant relief. When exercising this discretion, it considers the tenant’s conduct, the nature and seriousness of the breach, and its impact on the property’s value. The court may impose any conditions it deems appropriate.

Where forfeiture proceedings have been issued, tenants can apply for relief from forfeiture at any time until the possession order is enforced. In cases of peaceable re-entry, tenants can apply for relief as long as it remains equitable to do so.

Can a landlord keep a tenant’s belongings after forfeiture?

Unless the provisions of the lease expressly say so, a landlord cannot keep or dispose of a tenant’s belongings, unless they have first served a notice  under the Torts (Interference with Goods) Act 1977, giving the tenant the opportunity to collect those belongings within a “reasonable time.” In the interim period, the landlord is an “involuntary bailee,” responsible for the goods until they are returned to the rightful owner. The landlord must not recklessly damage or destroy goods and, if returning them to a third party, must take care to confirm that the third party has the tenant’s authority to receive the goods.

If the landlord, bailiff, or agent disposes of the goods without following proper procedures, the tenant can sue for conversion, trespass, or negligence.

Seek expert advice

Forfeiture can feel like a minefield to navigate, so it’s always best to seek professional, legal advice as soon as possible. For advice tailored to your situation, please get in touch with our Dispute Resolution solicitors, who would be happy to help.

You can also check out our recent webinar on the right to forfeit here. Our Property Dispute Resolution team provided some practical tips on the subject, as well as lessons to be learnt from case law.