Forfeiture Of A Commercial Lease – Part 3: Guide For Interested Parties

/ landlord and tenant

In Part 1 this blog series, we looked at bringing a commercial lease to an end from a landlord's perspective, and a tenant’s position in Part 2. Now, we are taking a look at forfeiture from the perspective of Interested Parties - undertenants and mortgagees.

What about undertenants and mortgagees?

Even where a lease comes to an end on the basis of forfeiture, undertenants and mortgagees are also able to apply to court for relief from forfeiture under section 146 (4) of the Law of Property Act 1925.

Surprisingly, the Court can grant relief to these parties even where the breach on which the landlord has relied is for non-payment of rent. If the Court grants a new lease, it will not be retrospective, and will apply to the party applying effectively as a new lease as a vesting order.

Practically, an undertenant or mortgagee can apply in response to the landlord's action against the tenant, or in its own proceedings. The Court will consider the same factors as if it were a tenant making the application, including whether the new tenant/undertenant will have security of tenure as a business lease, if it is in breach of covenants, and any hardship to the landlord.

The Court has discretion over the terms and conditions on granting relief to an undertenant or mortgagee. It can order payment of rent, costs or damages and making good of any breaches of covenant and other terms.

A balance to be struck: What if a landlord has granted a new lease to a third party?

It is not uncommon for a landlord, in a situation where it has commenced possession proceedings or re-entered premises forfeiting the lease, to seek out a new (and better) tenant. If this happens, and the old tenants, or undertenant or mortgagee, applies for relief from forfeiture, this can result in a sticky situation.

The Court will need to balance the landlord's needs to deal with its own property, with the former tenant’s right to relief from forfeiture. The Court will examine the landlord's conduct and whether they have acted reasonably, whether the new tenant knew about the forfeiture and was therefore on risk of an application for relief and whether the tenant/undertenant/mortgagee delayed in making its application for relief.

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.