A commercial landlord should consider the implications of exercising its right to forfeit a lease before taking steps to do so. To forfeit a lease, the landlord must issue court proceedings or change the locks to prevent access to the tenant by peaceable re-entry.
It should be noted a landlord’s right to forfeit a lease will depend on whether the tenant has breached a condition of the lease i.e. a fundamental provision which goes to the root of the contract.
The right to forfeit a lease is a stringent tactic and should only be exercised if the landlord becomes aware of a significant breach of the lease, for example if a tenant fails to pay the rent. Once the tenant has breached a term of the lease, the landlord must be careful not do anything which would inadvertently waive its right to forfeit, such as accepting payment towards rent arrears or demanding the rent. Should the landlord do so, it is arguable that it has acknowledged the lease as continuing to exist and therefore has waived the right to forfeit for that particular rent quarter. If the landlord waives its right to forfeit unintentionally, it will get the chance to forfeit again once the next quarter’s rent becomes payable, although the exact terms will be determined by what is set out in the lease.
Landlords should consider whether their main objective is to obtain vacant possession or whether they are seeking to recover rent arrears. If the latter, there are alternative remedies available such as drawing against any rent deposits, serving the tenant with a statutory demand or pursuing the Guarantor if there is one under the lease, amongst others.
For breaches other than non-payment of rent, a landlord must serve notice under section 146 of the Law of Property Act 1925, which provides details of the breach and the timescale to remedy the breach if applicable.
Landlords should bear in mind the length of time it may take to re-let the property. Where a landlord has a new tenant ready and waiting to move in there is little risk. However, where there are gaps in tenancies, landlords will be liable for outgoings such as rates, maintenance and insurance.
Landlords should also consider that once a lease is forfeited, there is little incentive for the tenant to pay any rent arrears. To recover the rent arrears, a landlord will need to issue court proceedings to obtain a monetary judgment.
If the landlord forfeits the lease, the tenant has the right to apply to the court to seek relief. If the tenant is successful, the court is likely to reinstate the original terms of the lease, provided the tenant discharges the arrears in full, and pays any costs and interest.
The tenant has six months to apply to the court for relief from the date of forfeiture if the breach relates to rent arrears.
Before taking steps to forfeit a lease, landlords must carefully consider their objectives and the risk of being left with the costs of a vacant property. It is therefore imperative that landlords seek independent legal advice when considering their options to end a commercial lease.
If you would like further information, please contact Joanna Hemsley.