Hello Forfeiture – my old friend
For the past couple of years, a commercial landlord’s ability to forfeit their leases has been severely curtailed with the COVID regulations effectively preventing any forfeiture from taking place.
Those restrictions came to an end on 24th March 2022. Landlords can now forfeit leases again.
This article takes the opportunity to clarify what forfeiture is, how useful it can be and its potentially problematic areas.
What is forfeiture?
Most modern leases have a clause in them that allows the landlord to peaceably re-enter the premises in the event of non-payment of rent or a breach of the lease. In practical terms, this gives the landlord the right to simply re-enter the premises and to change the locks, bringing the lease to an end or to issue court proceedings for forfeiture (the act of issuing the proceedings having the same effect in theory as changing the locks).
It is important, however, to follow the correct procedure and to be alert to defences that can be deployed.
Non-payment of rent
Where a commercial tenant does not pay rent, the landlord can re-enter without giving any notice at all. This can provide a very efficient way of forcing the tenant’s hand and either recovering possession or securing payment. The terms of the forfeiture clause in the lease need to be considered carefully, as most of them will stipulate how long the tenant has before the landlord can act and landlords should ensure they do not act early.
Once that period has passed, the landlord can re-enter itself or instruct bailiffs to do so on its behalf.
On re-entering, the lease ends immediately, and the tenant will have to buy itself back into the premises if it wishes to continue trading.
Breach of other covenants
If a commercial tenant is in breach of any other clause in the lease, then the landlord will need to serve a section 146 notice on the tenant.
The notice must be served in the way set out in the lease (otherwise it may well be defective) and must set out the breach of terms. Where the breach is capable of being addressed, the notice should provide time for the tenant to do that.
Once the period under the notice has expired then the landlord can either re-enter or issue court proceedings for forfeiture. At that point the lease comes to an end immediately.
Termination of lease
At the point forfeiture takes place, the lease ends. In some cases, tenants will seek to re-enter having paid the rent due (and costs) or negotiated with the landlord.
It is important to note that legally speaking, the original lease can only be resurrected by an order from the court.
If the intention is for the tenant to continue occupying under the original lease, then the tenant will need to make an application to the court, and the best course of action is to allow the tenant to occupy under a licence pending that application.
Without a court order, the tenant will acquire a new lease and new rights. This will be of particular concern if the original lease was contracted out of the Landlord and Tenant Act 1954 with the tenant having no right to a new lease, as a new lease may well give the tenant that right.
Waiver of right to forfeit
A landlord should proceed with some caution. If steps are taken to acknowledge the existence of the lease during, for instance, the period the tenant has to pay the rent before action can be taken, then the landlord runs the risk of waiving its right to forfeit, e.g., not being able to proceed with re-entry or any other form of forfeiture, until the breach occurs again.
Any action which can be said to be an affirmation the lease exists, such as the acceptance of rent, is likely to mean that any attempt to forfeit is invalid and liable to be set aside.
The safest course of action once a trigger for forfeiture arises is not to engage with the tenant and to return any payments that are received.
Relief from forfeiture
A tenant has the right either after forfeiture or, in the case of a section 146 notice, during the notice period, to apply to the court for relief from forfeiture.
This can be done on the basis that the outstanding rent has been paid (with costs) or that the landlord has waived the right to forfeit.
Such an application should be made promptly and within 6 months of forfeiture taking place. Relief is not guaranteed and is at the discretion of the court.
In the case of rent arrears, it is standard for a court to allow a tenant back in and resurrect the original lease, but only if all the outstanding rent, interest and costs (legal and bailiff) have been paid. A lot of landlords will therefore take a commercial view when the tenant opts to pay the rent after a forfeiture has taken place.
So, what does this mean for you?
Forfeiture is a useful and effective tool for a landlord to have but it needs to be wielded properly and with care. This article comprises a brief and basic overview of the position, but each situation could need a slightly different approach.
COVID – the after-effects
Whilst forfeiture is now back on the table as a valid remedy for commercial landlords, the impact of COVID does remain in limited circumstances.
Where rent arrears are being pursued for periods which are defined as protected periods under the Commercial Rent (Coronavirus) Act 2022 (the Act), the Act sets out a process that both landlord and tenant need to follow, specifically in the absence of agreement, reference to an arbitrator to determine what an appropriate resolution might be.
The ability to forfeit for rent that falls in the protected periods is prohibited for the time being.
Specialist legal advice for commercial landlords
If you have any questions arising from this article and wish to discuss any forfeiture queries, please do not hesitate to contact Richard Gore at GL Law by calling 0117 906 9400 or email firstname.lastname@example.org. Alternatively, please complete our contact form.