Commercial property expert Eleanor Cornthwaite explores whether relief from forfeiture can be granted in cases where there has been a deliberate breach of lease covenants.
When can a landlord forfeit a lease?
Landlords have the right to bring a lease to an end if a tenant is in breach however, there are various restrictions. The general rule is that the lease should contain an express forfeiture provision.
Forfeiting a lease
When drawing up leases of commercial property, a forfeiture clause should be included to enable the landlord to take possession of the premises in the event that a tenant is in breach of the lease.
Before the landlord can re-enter the property and take possession of the premises by way of either court proceedings or peaceable re-entry, the landlord may have to communicate its intention to forfeit the lease.
If the breach is for anything other than non-payment of rent, a landlord must let the tenant know that it intends to forfeit the lease by issuing a section 146 notice. If however, a tenant is in arrears of rent, a section 146 notice does not need to be served.
Applying for relief from forfeiture
If the landlord takes action to forfeit the lease the tenant may apply to court for relief from forfeiture.
The decision as to whether relief should be granted is at the discretion of the court. In general, courts will grant relief if the tenant remedies the breach, pays compensation, or if the breach cannot be remedied but the court is convinced that the tenant will adhere to the lease in the future.
When deciding whether or not to grant relief from forfeiture, the court will also consider the tenant’s conduct and whether it acted in wilful breach of the lease.
Freifeld v West Kensington Court
In the recent case of Freifeld and another v West Kensington Court Limited, the tenant had sublet a unit in breach of its lease. This resulted in a number of complaints being received from neighbouring tenants.
The landlord served a section 146 notice and forfeited the lease by counterclaim in other proceedings involving the tenant. The tenant then applied for relief from forfeiture which was refused by the County Court on the basis that the tenant had demonstrated a cynical disregard of its obligations.
The tenant appealed to the Court of Appeal on the basis that the lease had significant capital value and the landlord would obtain a substantial windfall if relief was not granted. The tenant proposed that the court grant relief on the condition that it would complete a sale and assignment of the lease within six months, failing which it would surrender it.
When making the decision, the Court of Appeal said that the wilfulness of the breach should be taken into account as it is not fair to grant relief and restore the parties to their previous contractual positions when a tenant has acted in blatant disregard of its obligations.
It also said that the value of the leasehold interest is relevant, although it is not enough for a tenant to simply say that forfeiture would result in a windfall for the landlord.
The Court of Appeal went on to state that relief may still be granted where a breach has been deliberate and special circumstances do not need to be shown however, a balancing exercise needs to be undertaken between the advantages gained by the landlord if the lease was to be forfeited and all other circumstances to determine whether forfeiture is a proportionate response.
The Court of Appeal granted relief from forfeiture on the condition that the tenant assigned the lease within six months.
The decision will likely come as unwelcome news for landlords who will now face a significant challenge in persuading a court that forfeiture is a proportionate response where the lease has a long time left to run and the landlord will obtain a substantial windfall. While it does emphasise the importance of lease covenants it shows that the parties and the courts are to look for alternatives to forfeiture in order to ensure compliance.
If you are a landlord of a commercial property and would like more information on relief from forfeiture, contact Eleanor Cornthwaite on 0161 761 4611
