Granting Relief from Forfeiture: late applications and windfalls

Forfeiture is a landlord’s ultimate remedy, allowing a landlord to end the tenant’s lease where the tenant is in breach.

The landlord’s right to determine a lease as a result of some default on the part of the tenant provides the landlord with security for performance of the terms of the lease. There are two ways of effecting forfeiture: by peaceable re-entry through a contractual right contained in the lease; or by issuing court proceedings pursuant to CPR Part 55. For more information on forfeiting a commercial lease for rent arrears read my previous post here.

The remedy of forfeiture is often viewed as a rather draconian measure available to landlords to deal with a defaulting tenant. Therefore, the power of the court to grant relief from forfeiture ensures that the landlord does not have the benefit of a remedy which is wholly disproportionate to the nature of the breach which led to the determination of the lease in the first place.

As a general rule, the court will grant relief from forfeiture provided that an application is made within 6 months of the Landlord effecting forfeiture. The statutory provisions under the County Court Act 1984 and Common Law Procedure Act 1852 place a time limit on the Court’s power to grant relief beyond 6 months. In the High Court, where forfeiture has been effected by peaceable re-entry, relief comes from the Court’s equitable jurisdiction.  Although there is no prescribed time limit, the court will use the 6-month limit as guidance. The Court will exercise its inherent equitable jurisdiction when deciding whether to grant relief in such circumstances.

I will now consider some of the recent case law developments surrounding applications for relief from forfeiture:

Pineport v Grangeglen [2016] EWCA 1316 (Ch)

Pineport is an example of when the Court used its equitable jurisdiction to grant relief some 14 months from when the landlord effected forfeiture. The decision arises from very specific facts and although it provides good authority of the Court’s discretion to grant relief, it should be adopted with caution.

At the time of forfeiture the tenant’s rent arrears amounted to £2,155.00. The Landlord effected forfeiture by peaceable re-entry. The tenant applied for relief from forfeiture 14 months later. The Landlord argued that due to the delay the tenant was barred from seeking relief.

Granting the tenant relief, the Court confirmed that an application must be made with “reasonable promptitude” but that it is an “elastic concept”. When considering whether an application had been made with “reasonable promptitude” the Court took the following factors into consideration:

• The reason for the tenant’s delay in making an application was due to financial constraints after being subject to a restraining order following a criminal prosecution for MOT fraud; the tenant had not obtained specialist legal advice; and that the director was suffering from severe depression.
• The landlord had taken no steps between forfeiture and trial to re-market the property.
• The value of the arrears represented less than 1% of the value of the underlease of £275,000 which would provide the landlord with a disproportionate windfall.
• The landlord was unable to show that he had suffered any prejudice as a result of the unpaid rent, forfeiture or the delay in the tenant’s application for relief.

This decision demonstrates that the court will take various factors into consideration when deciding whether to grant relief beyond the usual 6 month guidance.

Freifeld v West Kensington [2015] EWCA Civ 806

In Freifeld the court considered whether it should grant relief from forfeiture when the landlord stood to gain a substantial windfall.

The tenant, Mr Freifeld, was granted leases of seven commercial retail units forming part of a residential block in West Kensington Court. The leases were granted for a term of 99 years from 1982. The rent achievable in respect of the subletting was significant. Without the landlord’s consent, the tenant sub-let one of the units to a Chinese restaurant in breach of covenant. The landlord received several complaints from the residential occupants above. Consequently, the Landlord forfeited the headlease for breach of covenant. Due to the high value of the leases and the considerable period left to run, the landlord stood to gain a significant windfall of between £1-2 million on forfeiture.

The tenant made an application for relief which was refused by the County Court on the basis of the tenant’s conduct and “their cynical disregard for their obligations under the lease.”

On appeal, the Court of Appeal granted relief, on the condition that it assigned the lease within 6 months.

The court held that “the windfall point is about proportionality. The [tenant’s] egregious conduct is not relevant to the question of windfall…” The Court of Appeal held that the County Court was wrong not to consider the windfall that the landlord was set to gain and it should have considered this on its own merits and then weighed this against all other circumstances when concluding whether forfeiture was a proportionate remedy.

The decision makes it clear that the court will consider the proportionality of granting relief even were the tenant is in deliberate breach of his lease.

Ashley Gardens Freeholds Limited v Linda Marinelli Landor. County Court at Central London. April 2017

This case has been reported in various newspapers including the Daily Mail and the London Evening Standard. I have not had the benefit of reading the judgment and so the exact details of the case are unknown. However, the case deals with a particularly hot topic at the moment; the letting of a leasehold property on short term lets in breach of covenant. I have previously written about the perils of short term letting here.

Ms Landor is leasehold owner of a property in Westminster. Ms Landor was accused by the freeholder, Ashley Gardens Limited, of engaging in persistent short term letting thorough Airbnb and other similar platforms. The freeholder elected to forfeit the lease for breach of covenant, presumably the lease prohibited the use other than by a single family or for use of a business.

Again, I presume that Mrs Landor made an application for relief from forfeiture which was refused by the court. Making an order for forfeiture, HHJ Lochrane commented that “Mrs Landor ha[d] demonstrated over very many years that she either does not understand the rules or feels that they do not apply to her.”

Despite ordering forfeiture, the court delayed the order for 6 months to allow Mrs Landor an opportunity to sell the property. It is likely that the court considered the substantial windfall which the freeholder was set gain on forfeiture and decided that it would be disproportionate to make an outright order for forfeiture but instead allowed lessee an opportunity to sell the property.

General Motors v Manchester Ship Canal [2016] EWHC 2960 (Ch)

Finally, In General Motors the High Court again considered the question of windfall in granting relief from forfeiture to  a mere licensee.

Manchester Ship Canal Company Limited (MSC) granted General Motors UK Limited (GM) a perpetual licence to discharge surface water from its main manufacturing site into the Manchester Ship Canal. The licence was granted on the condition that GM pay an annual £50 fee. GM fell into arrears from 2013 (presumably due to an administration error) and MSC terminated the licence.

GM subsequently attempted to negotiate a new licence and MSC advised that it would grant the licence for an increase fee of £450,000 per annum (approximately a 900,000% increase!).

Granting GM relief from forfeiture, HHJ Behrens commented that the new licence fee which MSC was seeking from the new licence terms was an “obvious” windfall and that the court cannot, as a term of relief, rewrite the licence. The Court did not see any commercial policy reasons for not granting relief.

This recent spate of case law demonstrates that the court will exercise its discretion in granting relief from forfeiture were the court believes that it is equitable to do so.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*