Forfeiting a commercial lease when there has been a breach
A commercial landlord has the right to forfeit a lease where a tenant is in breach of a covenant.
The most common breach of covenant for a commercial lease is the duty to pay rent. If the tenant fails to pay rent when it falls lawfully due then the landlord will be entitled to terminate the lease. Fortunately, it is also one of the easier breaches to deal with. This post will concentrate on this breach of a commercial lease – the tenant’s failure to make rental payments – but a landlord is, in principle, entitled to terminate a lease for any breach of covenant within the lease.
A landlord’s power to re-enter a property and forfeit a tenancy has long been regarded as his security to ensure the payment of rent. Although the act of forfeiting the lease does not actually remedy the tenant’s breach, in that it does not produce money, it prevents any reoccurrence of the breach and provides the landlord with relief and from being burdened with a defaulting tenant.
Part II of the Landlord and Tenant Act 1954 provides tenants with protection and security of tenure. However, the right to terminate a lease by the exercising the right of forfeiture is preserved by s24(2) of the Act. The right to re-entry is a contractual right and is usually contained within a provision of the lease – it cannot be an implied provision. Therefore, it is important to check that such a clause exists in the lease. Before effecting the right to forfeiture the landlord (or his agent) must formally demand the rent unless the lease provisions make clear that this is not required. In practice, it is usually best to make a formal rent demand. It is also important to check how long the rent must be unpaid for before forfeiture can be carried out, this will also be in the clause but is usually 14 or 28 days.
Exercising a right of forfeiture and effecting a re-entry on to commercial premises demonstrates a landlord’s unequivocal intention to terminate the lease. A landlord can re-enter a property by one of two ways:
a) Peaceable re-entry;
b) Issuing proceedings at court
This means to physically re-enter the demised premises so that the landlord obtains possession of the property by physical excluding the tenant from the premises and securing it. This is often seen as the most favorable option by landlords for obvious reasons. It is a much faster way to terminate a lease than through court proceedings; it has minimum expenses; it avoids the often unpredictability of the court, and it shifts the responsibility to the lessee to apply for relief. The most common way of effecting forfeiture by peaceable re-entry is by simply changing the locks and taking control of the property. However, this cannot be done while someone is in the property and is never permitted if someone is living in any part of the property as their home.
It should be borne in mind that if there are possessions or trade goods in the property then there is now a process to deal with taking these as against money owed called Commercial Rent Arrears Recovery (CRAR for short). This needs to be followed.
Forfeiture by peaceable re-entry is not available for any other breach other than non-payment of rent. For any other breach of covenant, a landlord must serve an s146 notice pursuant to the Law and Property Act 1925.
Issuing Court Proceedings
The act of commencing and serving possession proceedings on the lessee is sufficient evidence of the unequivocal election by the landlord to forfeit the lease. Upon the service of an issued claim form notional physical re-entry occurs. The act of the landlord must be unequivocal and has the effect of forfeiting the tenancy, in the same way, a peaceable re-entry.
Upon one of the above actions being exercised the lease is thereby forfeited and is brought to an end. Once the lease is forfeited the landlord is still entitled to seek relief in respect of the tenant’s breach such as a money claim for rent arrears.
Relief form Forfeiture
Once forfeiture has been affected the onus to continue the lease is shifted to the tenant and to make an application to the court for relief from forfeiture. Where a lease has been forfeited for non-payment of rent it is quite rare for the court to not grant relief providing that the lessee applies promptly, discharges the arrears in full, and pays interest and the landlord’s reasonable legal costs incurred in effecting forfeiture. The granting of relief has the effect of reinstating the lease in the previous terms. Where the landlord and tenant agree the terms of relief between them and revive the terms of a lease without a court order then that agreement is likely to give rise to a new tenancy to which the Landlord and Tenant Act 1954 will apply, regardless of whether this was intended. It is important that both parties are cautious about this and legal advice should be sought before a private arrangement is entered into.
The law surrounding forfeiture of a commercial tenancy is a complex area of law. There are procedural issues that must be followed or there is a risk that a landlord will lose their right to forfeiture and a tenant will lose their right to relief. Anthony Gold acts for Landlords and tenants across a range of commercial property disputes and if there has been a breach, or possible breach, of a lease we suggest that you contact us for urgent legal advice to ensure that the procedure is followed correctly.