Forfeiture of Commercial Lease

A lease entails tenant obligations, including payment of rent, maintenance of property condition, and restrictions on assigning or subletting without landlord consent.

If these obligations are breached, the landlord may consider repossessing the property and terminating the lease, with some leases permitting re-entry in specific instances, like tenant insolvency.

Before proceeding with the forfeiture procedure, landlords should assess:

1. The property's potential benefit
2. Whether the lease allows forfeiture
3. If they've waived this right

In a robust rental market, landlords can easily secure new, higher-paying tenants, making forfeiture attractive.

However, in a slow market, landlords may face costs and security concerns with vacant properties, making forfeiture less favourable.

Tenants facing lease forfeiture should determine:

1. The existence of forfeiture rights
2. Any waiver by the landlord
3. Their decision to seek Court relief from forfeiture if necessary

When considering lease forfeiture due to non-payment of rent, it's important to note that this action typically requires explicit provisions within the lease agreement.

However, there's an exception: landlords may have an "implied" right to forfeiture when tenants breach a fundamental contract condition, like failing to pay rent (assuming rent payment is a standard lease requirement).

The forfeiture process can proceed through peaceful re-entry or by obtaining a court order.

Landlords should exercise caution, as accepting rent despite knowledge of a lease breach may be seen as waiving the right to forfeiture clause.

While landlords may opt to decline rent payments to preserve this right, it can be challenging, especially in cases of non-payment, where tenants can seek relief from forfeiture, with clearing arrears being a critical factor.

For landlords facing tenants with cash flow issues, an alternative might be considering a concession arrangement that allows monthly commercial lease payments instead of quarterly ones.

On the other hand, forfeiting a lease based on a breach of covenant—essentially obligations outlined within the agreement, typically undertaken by the tenant—requires explicit language in the lease granting the landlord this right in response to covenant breaches.

When facing the possibility of lease forfeiture due to non-payment of rent, landlords have several alternatives to consider:

1. Tenant Discussions: Engage in discussions with the tenant to resolve the payment issue amicably.
2. Utilise Security: Call upon any available forms of security, such as a rent deposit or guarantees.
3. County Court Debt Recovery: Pursue a standard debt recovery claim through the county court.
4. Serve a Statutory Demand: Issue a formal statutory demand, which serves as a precursor to a winding-up or bankruptcy petition, exerting significant pressure on the recipient. The recipient must either pay or challenge the demand within a short timeframe. An unanswered statutory demand can be used as evidence of insolvency or bankruptcy in subsequent legal actions.
5. Commercial Rent Arrears Recovery: Explore the commercial rent arrears recovery process to recover unpaid rent.

If the potential reason for lease forfeiture arises from issues other than non-payment of rent, such as unauthorised alterations, landlords may consider:

1. Negotiations with the Tenant: Engage in negotiations with the tenant to address the issue or reclaim possession of the property.
2. County Court Claim: Pursue a claim in the county court to seek specific remedies, such as injunctions or damages.

To facilitate negotiations, landlords can benefit from the expertise of Myerson's Property Litigation and Commercial Property Solicitors, as well as our team of alternative Dispute Resolution Solicitors.

Lease forfeiture can be achieved by a landlord through two primary methods: "peaceable re-entry" or obtaining a court order.

Peaceable Re-entry

Peaceable re-entry involves physically regaining possession of the property. The term "peaceable" refers to the person, not necessarily the property itself.

While some force can be used to recover possession of the property, it must not be excessive, and using violence when someone objects at the property is a criminal offence.

Commercial landlords often secure re-entry by actions like changing locks and blocking access to open areas.

Commercial properties often undergo re-entry outside of business hours when the property is likely to be empty. Landlords may choose to hire a certified bailiff for re-entry.

After re-entry, the landlord should prominently display a notice on the property, which typically includes:

• A general statement informing the tenant of lease forfeiture through re-entry.
• Reference to the lease clause authorising forfeiture.
• A statement that only individuals authorised by the landlord can legally enter the premises, with any unauthorised attempt being a criminal offense.
• Detailed property information and landlord or agent contact details.

Forfeiture by Court Proceedings

If the landlord opts for legal proceedings to forfeit a lease, the lease termination occurs when the court issues an order for possession. This order applies retroactively.

Specific procedures for court applications depend on whether the property is a commercial or residential property, as outlined in the civil procedure rules.

If a landlord attempts to forfeit the lease before the right to forfeit has arisen the tenant may bring a claim against the landlord for wrongful forfeiture.

The tenant’s remedy will be a declaration from the Court as to the wrongful forfeiture, together with a claim for damages or an injunction to allow the tenant back into the property.

The landlord may have to pay for any losses suffered by the commercial tenant, such as legal and other expenses.

When contemplating lease forfeiture, a landlord must exercise caution to avoid inadvertently waiving their rights.

A waiver occurs when the landlord:

1. Clearly acknowledges the ongoing existence of the lease.
2. Possesses knowledge of the tenant's breach.
3. Informs the tenant about the lease's continuation.

To minimise risk, landlords should initiate forfeiture proceedings promptly.

Tenants, if necessary, must demonstrate to a court that the landlord had knowledge of the breach and provide evidence of this awareness.

It's important to note that accepting rent, in particular, constitutes a clear act acknowledging the lease's continuation and informing the tenant of such continuation of the tenancy agreement.

If a landlord has executed peaceable re-entry, served an S.146 notice, or initiated forfeiture court proceedings, a tenant can safeguard their lease by seeking "relief from forfeiture" through a court application.

Relief from forfeiture is a discretionary equitable remedy.

The court's primary consideration is whether granting relief will restore both the landlord and the tenant to their pre-forfeiture positions.

If relief is granted, the lease will be reinstated, as if no forfeiture had occurred.

For leases forfeited due to non-payment of rent, the tenant must settle the outstanding rent to secure relief.

In cases of forfeiture for breaches other than non-payment, the tenant must either rectify the breach or compensate for breaches that cannot be rectified (provided compensation suffices) to defend against forfeiture.

Our client is a commercial landlord and property developer.

Case Overview:

Philip J Davies (Holdings) PLC held the reversion to a long lease of an entire building that had been rented to Carillion. Carillion had underlet part of the building to a charity.

Carillion entered liquidation and the liquidators disclaimed the head lease, leaving the undertenant in occupation but its right to occupy affected by the disclaimer.

We advised our client regarding their options, given a possible re-letting of the entire premises to a school (which was the condition upon the charity vacating).

Avoiding the situation where the charity became a periodic tenant or seeking a vesting order, our client forfeited the charity’s under lease and granted them a license to occupy, which enabled the charity time to find alternative accommodation and enabled our client to secure vacant possession which enabled the reletting of the entire building to the school.

Our clients are property developers and portfolio owners.

Case Overview:

Our clients are the owner of a long lease of parts of the basement, ground floor and upper floor of a building known as Asia House, formerly a commercial building. Our clients converted its premises into residential units worth £1.3m and rented them out.

The rest of the building is owned by our clients’ landlord which is a Jersey based subsidiary of an international pension fund. It had also been converted into residential units which are rented to apartment owners under long leases.

The landlord forfeited our clients’ lease by issuing possession proceedings following the service of a section 146 notice, alleging breach of covenants during the conversion works. Our clients sought relief from forfeiture.

The landlord excluded our clients’ and their tenants from the common parts of the building on the basis they had forfeited the lease. Our clients secured injunctive relief prohibiting the landlord from interfering with our clients’ and their tenants’ rights under the lease.

The landlord refused to give effect to the injunction obtained with the result that our clients applied for the landlord’s assets to be sequestered and the directors of the landlord be committed to prison. The landlord capitulated at the committal hearing and were ordered to pay our clients’ costs of the injunction and committal proceedings.

The landlord discontinued its possession claim and consented to our clients’ application for relief from forfeiture and agreed to pay our clients’ costs.

Laura Pile, a Partner in the Property Litigation team says “This matter demonstrates the depth of our technical and legal abilities in high value complex matters.”

Our client is a commercial landlord.

Case Overview:

The tenant occupied the commercial property and traded as a garden centre. The tenant had significant arrears of rent.

We advised the landlord to use their right to forfeit the lease and peaceably re-enter the property and change the locks.