Commercial lease forfeiture is a complex area of law with plenty of traps for the unwary. Here’s our short introductory guide.
Should you have any questions, our team is available on 01225 462871. Alternatively, you can contact them by completing the Contact Form at the foot of this page.
What does forfeiture mean?
Forfeiture is a landlord’s right to end a lease and take back possession of a property if the tenant breaches one or more lease terms. The lease must expressly confer a right to forfeit, ie there must be a ‘forfeiture clause’ or a ‘proviso for re-entry’.
Typically, a right to forfeit arises when:
- the tenant fails to pay their rent on time.
- there are persistent breaches of one or more lease covenants, eg a repairing covenant.
- the tenant suffers an insolvency event such as a winding up petition. An insolvency event, such as a tenant going into administration, can restrict a right to forfeit, even in circumstances where the landlord has already taken steps to issue forfeiture proceedings.
A commercial lease forfeiture clause can be contrasted with a break clause exercisable by a landlord. Although both confer a unilateral right to terminate, only where the landlord exercises a right to forfeit the lease can the tenant apply for relief against forfeiture (see Richard Clarke & Co v Widnall ).
Covid-19 commercial rent arrears
After two years, the Covid-19 commercial rent arrears moratorium ended on 25th March 2022. Section 82 of the Coronavirus Act 2020, which had protected commercial tenants from eviction for rent arrears, was repealed and replaced with a binding arbitration scheme.
Is lease forfeiture reversible?
The forfeiture of a lease is not reversible unless the court orders relief from forfeiture (see below). Forfeiture is not, therefore, a step that a landlord should take lightly, particularly if the reason behind it was non-payment of rent. That is because a potential new tenant is likely to want reassurance that the former tenant has not applied to the court for relief from forfeiture, which can take up to 6 months.
What is relief from forfeiture?
Relief from forfeiture is a remedy the court can grant to a tenant if:
- they have forfeited the lease because of rent arrears; but
- within six months of the date of forfeiture they paid all the arrears, plus any interest and the landlord’s costs, thereby addressing the underlying reason for forfeiture.
The court has the discretion to grant or withhold relief. However, it is generally exercised in favour of the tenant if they have satisfied these criteria. The result of the court granting relief from forfeiture is the reinstatement of the lease, with the parties returned to the same position that existed immediately before the alleged breach.
Forfeiting a Lease
A landlord must proceed cautiously before forfeiting a lease. If they forfeit when a right to forfeit has not arisen, the tenant can bring a claim for wrongful forfeiture.
Once the landlord establishes a right to forfeit, save for cases involving unpaid rent, they must follow the statutory notice procedure in Section 146 of the Law of Property Act 1925. The section 146 notice must specify:
- details of the breach of covenant.
- how the tenant should remedy the beach within a reasonable time (that is, if it is capable of remedy).
- the amount of compensation the tenant must pay for the breach.
The landlord must serve the Section 146 notice in accordance with the specific notice provisions in the lease.
The landlord is entitled to peaceably re-enter the property, or issue court proceedings seeking forfeiture if the tenant:
- fails to remedy the breach within a reasonable time; or
- fails to pay satisfactory compensation to the landlord.
Losing the right to forfeit
The landlord – or their agent in full knowledge of the circumstances giving rise to the right to forfeit – can inadvertently lose that right. This happens if they unequivocally recognise the lease’s continued existence and communicate that to the tenant. The most common scenario where this happens is when the landlord or their agent demands rent which has fallen due after the breach of covenant.
Whether the right to forfeit survives such an event depends upon whether the breach is classed as ‘continuing’ or ‘once and for all’. The former will survive, but the latter will not.
Commercial lease forfeiture is a complex area of law with plenty of traps for the unwary. Getting it wrong can prove very costly. Whether you are a landlord seeking to forfeit a commercial lease or a tenant on the receiving end, always take early legal advice.