In a series of articles on commercial property disputes, we will be exploring the options open to a landlord who wishes to recover possession of its commercial premises.
This article deals with forfeiture, e.g. where a commercial tenant does not pay rent or breaches some other term of its lease. Here we cover the issues on a basic level, and you can get in touch directly for expert insight directly into your situation.
What is forfeiture?
Most modern leases have a clause in them that allows the landlord to peaceably re-enter the premises in the event of non-payment of rent or a breach of the lease. In practical terms, this gives the landlord the right to simply re-enter the premises and to change the locks, bringing the lease to an end. It is important, however, to follow the correct procedure and to be alert to defences that can be deployed.
Non-payment of rent
Where a commercial tenant does not pay rent, the landlord can re-enter without giving any notice at all. This can provide a very efficient way of forcing the tenant’s hand and either recovering possession or securing payment. The terms of the forfeiture clause in the lease need to be followed carefully, as most of them will stipulate how long the tenant has before the landlord can take action.
Once that period has passed, the landlord can re-enter itself or instruct bailiffs to do so on its behalf. On re-entering, the lease ends immediately, and the tenant will have to buy itself back into the premises if it wishes to continue trading.
Breach of other covenants
If a commercial tenant is in breach of any other clause in the lease, then the landlord will need to serve a section 146 notice on the tenant.
The notice must be served in the way set out in the lease (otherwise it may well be defective), and must set out the breach of terms. Where the breach is capable of being addressed, the notice should provide time for the tenant to do that.
Once the period of time under the notice has expired then the landlord can either re-enter or issue court proceedings for forfeiture. At that point the lease comes to an end immediately.
Termination of lease
At the point forfeiture takes place, the lease ends. In some cases, tenants will seek to re-enter having paid the rent due (and costs) or negotiated with the landlord.
It is important to note however that legally speaking, the original lease can only be resurrected by an order from the court. If the intention is for the tenant to continue occupying under the original lease, then the tenant will need to make application to the court, and the best course of action is to allow the tenant to occupy under a licence pending that application.
Waiver of right to forfeit
A landlord should proceed with some caution. If steps are taken to acknowledge the existence of the lease during, for instance, the period of time the tenant has to pay the rent before action can be taken, then the landlord runs the risk of waiving its right to forfeit, e.g. not being able to proceed with re-entry or any other form of forfeiture, until the breach occurs again.
Relief from forfeiture
A tenant has the right either after forfeiture or, in the case of a section 146 notice, during the notice period, to apply to the court for relief from forfeiture. This can be done on the basis that the outstanding rent has been paid (with costs) or that the landlord has waived the right to forfeit. Such an application should be made promptly and, normally, within 6 months of forfeiture taking place.
In the case of rent arrears, it is standard for a court to allow a tenant back in and to resurrect the original lease, if all the outstanding rent, interest and costs (legal and bailiff) have been paid. A lot of landlords will therefore take a commercial view when the tenant opts to pay the rent after forfeiture has taken place.
So what does this mean for you?
Forfeiture is a useful and effective tool for a landlord to have but it needs to be wielded properly and with care. This article comprises a brief and basic overview of the position, but each situation could need a slightly different approach. Make sure you get in touch with our Dispute Resolution team to discuss any issues you have.