Relief from Forfeiture: Another recent case

14th August 2015

Obtaining relief from forfeiture in the face of seemingly flagrant breaches has hit the headlines more than once in recent weeks [1]. In another recent case, Freifeld and another v West Kensington Court Limited [2] the Court of Appeal has reiterated that a leaseholder may be granted relief from forfeiture notwithstanding that they have committed serious and deliberate breaches of their lease and has examined the limits of the courts’ discretion and the factors to be taken into account in granting relief.

Facts

In Freifeld, the appellants were tenants of a property comprising several commercial units which had been sublet, one of which was being run as a Chinese restaurant (the Property). The subtenants of the Property had been subject to a number of complaints regarding poor waste management, smoke, noisy air conditioning units and preparation of food in a communal courtyard area. In December 2011 the tenants granted a new sublease to the existing subtenants of the Property without the permission of the landlord, in clear breach of covenant. The landlord served a section 146 notice citing breaches of the alienation and user provisions on the tenants and forfeited the lease of the Property by issuing a counterclaim in ongoing court proceedings.

The tenants’ initial application to the court for relief from forfeiture was refused, with the County Court judge stating that exceptional circumstances would need to arise for relief to be granted where the breach was deliberate. A further application was made on the basis that not to allow relief would be disproportionate given the size of the windfall the landlord would receive. The tenants also stated that one of the terms of relief from forfeiture should be that they assign their leasehold interest within 6 months. The judge refused the application, saying that the lease, in fact, had little value given that it was forfeit and stating that the tenants had had ample time to produce additional evidence in support of their application for relief, but had failed to do so. The tenants appealed.

Appeal

The Court of Appeal held that the County Court judge had erred in his initial decision not to grant relief. Whilst on the facts of the case the judge was entitled to refuse to grant relief due to the flagrant and continuing breaches of the lease, not enough regard was then taken of the proportionality of refusing relief from forfeiture.

The Court of Appeal stated that, had the lease remained forfeit, the landlord would have stood to receive a £1-2 million windfall.  It reasoned that the forfeiture provisions in the lease were to ensure compliance with the covenants rather than to provide the landlord with a windfall (particularly a windfall of such a large size) and relief was therefore granted on the basis that the tenants sell their lease within 6 months of 1 September 2015.

WM Comment

This case is consistent with Magnic v Al Hussan [3] and highlights the current approach of the courts. Relief from forfeiture on fulfilling certain conditions will be granted where possible, even in some circumstances where there has been a deliberate breach of the lease. This will come as welcome news to lenders and leaseholders of both commercial and residential properties who will want as broad a scope as possible for obtaining relief when the covenants of a lease have not been complied with.

However, it should not be assumed that relief will be granted in all instances. Leaseholders should certainly not assume that the courts will always grant relief where there has been a deliberate and flagrant breach. Indeed, Lord Justice Briggs stated that the decision “should not be misinterpreted as conferring carte blanche on tenants to disregard their covenants”.

The ability to grant relief where the breach relates to a covenant other than rent is within the courts’ discretion and tenants in breach should take immediate action to comply with their covenants or risk the lease remaining forfeit and their potentially valuable leasehold interest being lost.

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[1] WM Insight – Forfeiture and Relief: Clarification of court’s discretion
[2] [2015] EWCA Civ 806 (30 July 2015)
[3] [2015] EWCA Civ 224