The Rules of Forfeiture of Lease
Once again, businesses are facing uncertainty over Brexit. With the current government seemingly determined to leave the European Union on the 31st October “by any means necessary”, regardless of how optimistic you are, many economic reports point to a resulting recession. The above comment has to be caveated by the fact that, when it comes to Brexit, things can change overnight.
But what has this got to do with lease forfeiture?
Landlords may need to be prepared for an increase in commercial property tenants struggling to meet their rental payments. And this, in turn, could lead to questions of whether a landlord has the right to forfeit the lease; the answer to which is yes, but under very strict conditions. Forfeiture of lease should never be undertaken without obtaining experienced legal advice as it is very easy to take action that could result in a civil claim being brought against you. In worst-case scenarios, you could face criminal prosecution.
What is the meaning of forfeiture of lease?
Forfeiture provides a landlord with the right to end a lease and re-enter the property if:
- The tenant has breached a lease covenant, or
- A triggering event set out in the lease has occurred; for example, the tenant becomes insolvent.
If there is no specific clause in the commercial tenancy agreement to allow for forfeiture following a specific event, the right can still be exercised; however, it is prudent to proceed with extreme caution. To legally exercise the right of forfeiture, the tenant’s breach of covenant must strike at the heart of the contract. The most common breach is that of not paying rent.
What are the factors to consider in forfeiture of lease?
If you have established you have a right to forfeiture, you must take time to consider whether it is in your best interests to do so. For example, in times of economic hardship, when it is difficult to find new tenants, it may be counter-productive to forfeit your existing lease.
You should also consider:
- Are there any original tenant or guarantors under the lease who would be released on forfeiture of the lease?
- Is there a guarantor who is liable to take a new lease following forfeiture? If so, would you want them as a direct tenant?
- Would forfeiture give you a welcome opportunity to redevelop the property?
- Would there be a risk of squatters taking up occupation in the empty property?
For breaches not involving non-payment of rent, a notice under section 146 of the Law of Property Act 1925 must be issued, and should set out:
a) the breach,
b) if the breach is capable of remedy, that you require it to be remedied and;
c) the requirement of the tenant to pay compensation for the breach.
The tenant must rectify the issues stated and pay compensation within a stated period or reasonable time. If the tenant fails to do so, you will be entitled to exercise forfeiture. What constitutes ‘reasonable time’ will be decided on a case by case basis.
How can I re-enter the property?
There are two ways of re-entering the property:
- Peaceable re-entry
- Issuing court proceedings
This involves the landlord peacefully entering the property and securing it against the tenant (normally by changing the locks). Peaceable re-entry provides a swift resolution and puts the burden on the tenant to apply to the court for relief.
You cannot exercise peaceable re-entry if someone is in the property and it is never permissible if the tenant ‘lives above shop’. You will also need to ensure you comply with the provisions of the Commercial Rent Arrears Recovery (CRAR) when dealing with leftover stock and possessions left by the tenant.
You can only use peaceable re-entry for non-payment of rent.
Issuing court proceedings
A claim for possession of land can be issued at any County Court hearing centre (unless it is appropriate to issue in the High Court and this would only be the case in exceptional circumstances).
Although issuing court proceedings is a more expensive and slower process, it is far less risky than peaceable re-entry. Be aware that if you demand or accept rent from the tenant, you will waive your right to forfeiture. Any other conduct deemed by the Court to unequivocally affirm the lease could also result be deemed as a waiver of your rights. A commercial lease solicitor should be able to help you with this.
As soon as the tenant becomes aware of proceedings, they can apply for relief from forfeiture. This can be made in the form of a counterclaim against the landlord or as a claim by a tenant or third party who has a right to relief, such as a mortgagee.
How to overcome lease forfeiture
Forfeiture is a draconian remedy and is therefore highly regulated by the courts. It is advisable to consult with your Solicitor before taking any measures to re-enter the property. To successfully exercise your right to forfeiture, you need to act with prudence and patience, ensuring your best interests are protected at all times. Ensure you speak to a professional property solicitor to keep you well informed of the law in this area.
Guillaumes Weybridge solicitors are a highly experienced team of commercial property lawyers and landlord lawyers taking a professional but personable approach to property law. If you're interested in working with us, don't hesitate to get in touch.