This blog takes a look at what forfeiture is and what a landlord of commercial property can do when certain terms of the lease are breached. In Part 2, we take a look at forfeiture from a commercial tenant's perspective.

Common law right to enter and change locks

Historically, where a tenant does not pay rent, the landlord has had a right to simply re-enter the premises, and take control by changing the locks. This process, known as ‘re-entry’, was a common law right - something recognised by English courts for centuries. That right, subject to some important statutory and common law checks and balances, still applies today. However, the right to re-enter is almost always stipulated expressly in writing within a modern commercial lease.

This right to re-enter is one of two important mechanisms available to a landlord in the event of breach of a condition or covenant of the lease. The most common condition resulting in a lease coming to an end is the non-payment of rent.

The term ‘forfeiture’ in relation to property, means the right to end a lease and is usually synonymous in this context with ‘re-entry’.

When can a landlord forfeit a lease?

The right to determine (bring to an end) the lease will usually be set out in the lease itself and includes a) where the tenant is in breach of its obligations, and b) certain other events specified in the lease (e.g. bankruptcy).

The landlord can forfeit the lease by either peaceably re-entering the premises (literally going in, changing the locks) or by starting court proceedings for possession of the property.

Starting court proceedings can be less risky, as the process of re-entry can be fraught with difficulties. A landlord must also be careful because if they were not entitled to re-enter they may be liable to a claim for losses, or an injunction together with legal costs from the tenant. If there is a residential element, a court order is required, under Protection from Eviction Act 1977. Criminal offences can be committed if violence is used or threatened (Criminal Law Act 1977, s.6).

What shouldn't a landlord do when forfeiting a lease?

Once the landlord has knowledge of the breach, they need to make a decision. They can either forfeit the lease by proceedings or peaceable re-entry. If they do not, they are then at risk of waiving the right to forfeit. Waiver can be any unequivocal act which recognises the lease as continuing. An example of this will be accepting and demanding rent.

This is especially important in respect of ‘once and for all’ breaches, including the covenants to carry out repairs by a set date, to pay rent, to not assign or sublet and covenants not to make alterations. Where one of these breaches has occurred and the landlord knows about it but then treats the lease as continuing (for example, by demanding rent), the landlord will be taken to have waived their right to forfeit. If the landlord tries to follow through by re-entry or starting proceedings, the tenant will be able to defend on the basis that the landlord waived their right to forfeit the lease.

Procedure

If a landlord wishes to exercise the right to forfeit by peaceable re-entry, the moment they do this the lease will terminate. This is subject to any claim for relief from forfeiture by the tenant or other third parties. This option might be seen as more risky, and a landlord should check that right has definitely arisen (with reference to the lease, for example ensuring that if any period of time is set for arrears of rent, that this time has elapsed).

For any breaches other than non-payment of rent, the landlord must serve a section 146 notice giving the tenant a reasonable time to remedy the breach.

Forfeiture by issuing proceedings

A landlord will do this by issuing a claim for possession on the grounds of breach of conditions of the lease. This is done using the claim form N5 and with particulars of claim setting out terms of the lease, the breach and the claim for possession and any legal costs.

Unlike the re-entry option above, a lease will only be forfeit by proceedings once the landlord has served the proceedings on the tenant. Being served is the legal term given to the tenant receiving the sealed claim, or being deemed to have received it.

The tenant will be given a Response Pack and time before the hearing to respond to the claim. Possession hearings will be listed for a hearing not less than 28 days from when the claim is issued, and tenants will need to be given at least 21 days’ notice before the possession hearing.

The first possession hearing is usually listed for 10 minutes or so, and if the claim is defended or requires a longer hearing, the court will give directions.

It is not until the court orders possession, recognising the forfeiture, that a lease will actually determine (come to an end). There can therefore be a “twilight period” between when the possession claim is served (forfeit) and the court's order for possession.

A landlord can claim for the time the tenant is in occupation from the date the claim is issued up to the date of possession ordered by the court. Rather than rent, this is called and for mesne profits, or damages for use and occupation.

A landlord should check whether it is entitled to recover its legal costs of the process under the terms of the lease. This will usually be more favourable than asking for costs under the usual rules (which can be fixed) as the court will assess it on the basis of a contractual entitlement.

Relief from forfeiture

This will be dealt with in Part 2 of this blog series in more detail. Essentially, a tenant, or a third party such as a sub-tenant (even an unlawful one) can apply to court for relief from forfeiture. To do so they will usually need evidence to show that they have cured the breach, usually by paying the full rent owed by the date of the hearing, and should also pay the landlord's costs incurred.

If at the date of the hearing the rent and landlord's costs are paid, the court may award relief, which will mean that the lease continues as if it had never been forfeit.

Even if a forfeit lease ends any interests underneath it, this does not stop undertenants or mortgagees from applying for relief from forfeiture.

This article was written by Toby Walker, Dispute Resolution Partner at Allan Janes LLP. If you need to speak to one of our property dispute specialists contact us on 01494 893512.