McCormicks has seen an increase in the number of clients seeking advice on the law of forfeiture with regard to commercial leases, both as landlord and as tenants. The law of forfeiture contains many pitfalls for the unprepared - often operating in a counter-intuitive manner. Here Solicitor Will Bates explains some of the issues to look out for.
What is forfeiture?
Forfeiture is a method by which a landlord can reclaim possession of premises when a tenant is in breach of covenants contained in the lease. Forfeiture can be effected by peaceable entry or via court proceedings. It is vital to know which action is appropriate and that the relevant procedures are followed.
Where the tenant has fallen into arrears with the rent, it may be possible for the landlord to forfeit by peaceable re-entry. This is a cost-effective method of terminating a commercial lease.
Forfeiture by peaceable re-entry is a common law concept that allows the landlord to forfeit the lease (usually by employing bailiffs) without serving a Notice or any other warning. Usually, the lease will provide that the right to re-enter arises if rent is unpaid after a certain period of time (e.g. 21 days) after the rent fell due.
In other circumstances, it is necessary for the landlord to serve the tenant with a Notice and seek possession through court proceedings before regaining possession of the premises. However, this article focuses on the right to forfeit by peaceable re-entry for non-payment of rent.
Be aware of common pitfalls
The law of forfeiture is complex and can be confusing. If the landlord forfeits the lease after waiving their right to do so, the tenant may claim wrongful forfeiture. If the lease has been wrongfully forfeited, the court will grant relief (and the tenant will be allowed back into the premises) and damages for losses arising from the tenant's exclusion.
The most common pitfall for landlords is the requirement that they do not do or say anything to waive their right to forfeit the lease. Waiver is committed if the landlord (or its agents) do anything that acknowledges that the lease is continuing and this action is communicated to the tenant. If the landlord acknowledges that the lease is continuing it does not waive the breach itself, but does waive the right to forfeit. Therefore, if a landlord wishes to regain possession of premises, they must be very careful in considering whether to issue rent demands or communicate to the tenant that rent arrears are owed. It may seem surprising that a landlord may waive rights simply for demanding a debt which is owed to them.
By way of an example, if a landlord makes a demand for the payment of an annual insurance premium (which is reserved as rent in the lease), they could be deemed to have waived their right to forfeit the lease for the entire period of that insurance, even if it is not actually paid. The reasoning is that the landlord’s express recognition of the continuing lease is inconsistent with an intention to bring the lease to an end. In that example, it could be argued that the landlord has waived its right to forfeit the lease for a whole 12-month period. The landlord is still entitled to that rent payment as a matter of contract but the right to forfeit for those arrears is lost for good.
Decide whether to demand rent or reserve the right to forfeit the lease
This commonly leads to a situation where, if the tenant is in arrears, the landlord must consider whether it wants to reserve its right to forfeit the lease.
A properly drafted lease will (from the landlord’s perspective) always state that rent is due whether formally demanded or not. However, how to deal with a tenant who is in arrears can be particularly difficult if the tenant perhaps does not understand that the rent is due whether rent demands are issued or not.
Of course, a landlord should also always consider the state of the property market before forfeiting a lease. It has been well reported that a number of struggling retail chains have successfully negotiated reductions to rent as landlords try to avoid owning empty premises. A vacant property is more likely to fall into disrepair.
Seek advice early
A landlord should be aware that as soon as they become aware of a breach of covenant occurring, they must decide whether to determine the lease or allow it to continue; the landlord must ensure they do nothing to waive the breach on which they may want to rely. If you, as a landlord, are considering whether to forfeit a lease you should seek legal advice as soon as you are aware of the breach.
Conversely, if you are a tenant who has had your lease forfeited you should seek advice as soon as possible if you wish to remain in the premises. Forfeiture is a form of additional penalty (for a breach of contract) so the court often grants relief from forfeiture providing the breach is remedied. Where forfeiture is for non-payment of rent, relief is automatically granted if the tenant pays all arrears and the landlord’s costs.