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Forfeiture ... that's a relief

17 June 2015

A landlord's right to forfeit for breach of covenant by the tenant is a useful remedy commonly found in leases.

Forfeiture must generally be preceded by the service of a section 146 Notice under the Law of Property Act 1925, however such notice is not required for non-payment of rent and in addition, no formal demands for rent need to be made if the forfeiture clause states that the landlord may re-enter if the rent is in arrears 'whether or not formally demanded'.

A landlord must be careful not to expressly or impliedly waive the right to forfeit though; an unequivocal act by the landlord or his agent that recognises the existence of the lease after the right to forfeit arises will result in waiver of the right. This is most commonly done by accepting rent from the tenant.

On the other side of the coin, relief from forfeiture is a useful remedy available to a tenant following a landlord exercising its right to forfeit. A tenant cannot apply for relief from forfeiture for breaches of covenant other than for non-payment of rent after a landlord has forfeited the lease by court proceedings and has taken possession. However where entry is obtained peaceably (by the landlord changing the locks to the premises), the tenant retains the right to apply for relief even after the landlord has taken possession of the property.

The courts have a wide discretion whether to grant relief from forfeiture and will often grant it if the tenant either remedies the breach or pays compensation (if the breach cannot be remedied), however the court must be satisfied that the tenant will carry on performing its obligations under the lease.

The Court of Appeal case Magnic Ltd v Ul-Hassan and another (2015), has provided further guidance on this issue. The tenants ran a pizza takeaway without planning consent in breach of a covenant not to violate the Town and Country Planning Act 1990. The landlord served the requisite section 146 Notice hoping to forfeit the lease. A possession order was obtained on 14 January 2011 on the basis that if trading ceased by 11 February 2011, relief from forfeiture would be granted. The possession order was stayed on 8 February 2011 pending the tenant's appeal, but, crucially, the tenants continued to trade until 31 May 2011 when the stay was lifted. The landlord then sought a declaration that the lease had been forfeited as the tenants had continued to trade after the 11 February deadline. The tenant's application for relief (on the basis that the stay extended the possession order deadline) was rejected first by a district judge and then by the County Court before being allowed by the Court of Appeal.

The court mentioned a number of points which had swayed their decision. First, the landlord would have been able to significantly increase its financial wellbeing by setting a market rent from a new tenant if the lease was forfeited. Second, the tenants ceased trading as soon as their appeal was dismissed, indicating that they would have ceased trading on the trading deadline had the stay not been obtained. Third, the tenants' conduct was not deliberate – they had an honest belief that what they were doing was correct and they relied on legal advice saying that the stay had extended the deadline for trading. As a result, the court granted relief from forfeiture on the basis that the tenant's decision to continue trading was reasonable, not a deliberate disregard for the law.

It is clear going forward that the courts will take into account all the circumstances in a given situation, including a tenant's intentions and whether any decision would be disproportionate or unjust. It is now evident that the purpose of reserving a right of re-entry is to give a landlord security for the performance of the tenant’s covenants – forfeiture should not be used as a penalty on a tenant for their breaches.