Forfeiture is a Landlord’s right to determine a lease and take back its property where a tenant is in breach of its obligations under a lease.
Forfeiture for Commercial Property
Commercial Landlords should consider whether forfeiture is an appropriate step in all the circumstances. Key considerations will include whether it is in the Landlord’s commercial interests to take back the property. This may be particularly salient in a receding economy, in which it may be difficult to identify a new tenant. If a new tenant is not found, the Landlord may be liable for outgoings during any void period. These would include business rates, insurance costs etc.
There may also be an original tenant (in the forfeiture of a sub-lease) or guarantor who will be let off the hook by the forfeiting of the lease. Alternatively, do the terms of the guarantee mean that the guarantor automatically takes a new lease on forfeiture, is that desirable? Would there be security issues with the property being empty? For example, would it be at risk of being occupied by squatters?
On the other hand, forfeiting the lease will mean that the Landlord regains control, provide an opportunity for any development works to take place and offers the prospect of putting in a place a higher calibre tenant.
Forfeiture for Residential Property (Long Leases)
Forfeiture is also open to Landlords of residential property under a long leases where the Tenant is in breach of covenant.
The Lease must allow a Lessor to initiate forfeiture proceedings, which is a common provision.
Examples of where forfeiture has been allowed by the Courts in respect of residential property include where a Lessee altered a kitchen without licence from the Lessor, a failure to pay ground rent or services charges or even leaving a property unoccupied with no forwarding address.
The pre-cursor to forfeiture proceedings is the Lessor serving a Section 146 Notice on the Lessee for breach of Lease. The Lessor needs to give the Lessee the opportunity to remedy the breach(es). If not remedied, the Lessor may apply to the Court for possession.
A Lessee may make an application for relief from forfeiture. The Court has a wide discretion to Order relief from forfeiture based on the conduct of the parties and all the circumstances of the particular case.
How the Court decide whether to allow forfeiture or to grant relief
The law around the concept of forfeiture is complex. In order to make an Order for forfeiture, there must be a breach of lease that is “substantial”, it must be capable of being remedied, the Tenant/Lessee must have been given notice of the breach and the opportunity to remedy it and the breach must not have been waived by the Landlord/Lessor.
If a Landlord/Lessor can meet those requirements, then they are entitled to apply to the Court for a Possession Order and seek to forfeit the Lease.
The Court will consider the application on the basis of the “balance of convenience”. This means that the Court will “weigh up” the competing interests of the Landlord/Lessor, in enforcing the Lease, against the Tenant/Lessee, who seeks to retain possession. The Court will consider various factors including the nature and severity of the breach, the degree of hardship that the forfeiture will cause the Tenant/Lessee, the extent to which the Tenant/Lessee has complied with the Lease in the past and the Landlord’s/Lessor’s willingness to negotiate with the Tenant/Lessee.
The Leasehold Reform (Forfeiture) Bill, currently at Second Reading stage, anticipates an overhaul of the rules relating to residential forfeiture. Watch this space.
We regularly advise commercial and residential clients on forfeiture, both on behalf of Landlords, Lessors, Lessees and Commercial Tenants. Get in touch if you need advice in relation to this subject matter.