The basics of forfeiture explained

24th January 2014

It is hardly surprising that in today’s economic climate some tenants are struggling to meet their rental payments. This often leaves landlords in a difficult situation, unsure of their rights and keen to secure an ongoing rental income. This article examines one of the remedies available to landlords in such circumstances: the right of forfeiture. Establishing and enforcing this right is not often straightforward and therefore this article will examine situations in which the right of forfeiture most commonly arises, the importance of preserving this right, and issues to be aware of regarding enforcement.

What is forfeiture and when can it be used?

The ability to forfeit enables a landlord to re-enter their property following a breach by the tenant, and by doing so, terminate the lease. Depending upon the reason for forfeiture, termination can take place with immediate effect, or following a period of notice.

In order to be able to forfeit a lease, a landlord will firstly need to establish the basis of their right to do so. The most common way to do this is to rely on a specific clause in the lease which grants to the landlord the right to forfeit in certain circumstances.

It is also worth noting that, in certain situations, a landlord can exercise a right to forfeit in the absence of a specific clause in the lease. If the tenant has breached a condition of the lease (i.e. a fundamental provision going to the root of the contract) then the right arises automatically. However, the right should be exercised with caution, following legal advice, to establish whether the tenant’s breach does indeed go to the root of the contract. The danger of attempting to forfeit a lease in the absence of an explicit right to do so is that the landlord could be in breach. Legal advice should therefore be sought in relation to breach as soon as it occurs.

Factors to consider

Care should also be taken to ensure that the clause relied upon actually covers the breach in question, and that any preconditions to the exercise of the right have been complied with. It should be borne in mind that in an insolvency situation, it may be wise to seek further advice as additional requirements and/or obligations may arise before the right to forfeit can be exercised. For example, if a corporate tenant is in administration, then permission of the court is needed, or consent from the administrator, before a lease is forfeit.

If a right to forfeit arise, a landlord must then follow a statutory notice procedure before the lease can be terminated. In relation to all breaches, apart from non-payment of rent, a s146 [1] notice must be served upon the current tenant, giving them time to remedy the breach in question. The notice must set out the breach complained and, if the breach is capable of remedy, contain a request to do so and/or pay monetary compensation. It is only following the service of this notice, and a subsequent failure by the tenant to remedy the breach within a reasonable or stated period and/or pay reasonable compensation, that a landlord can exercise its right to forfeit.

Preservation

Establishing whether a right to forfeit exists raises various issues and the position may not, therefore, be immediately clear. So what should a landlord do if they believe a tenant has breached the terms of the lease, thus entitling the landlord to forfeit?

It is imperative that, in a potential forfeiture situation a landlord preserves any right which may exist. Care should be taken to ensure that the right is not lost (waived) through any action on the part of the landlord. No action should be taken which affirms or accepts the continued existence of the lease.

Ideally, therefore, a landlord should have no contact with the tenant, or its representatives, until the position has been fully considered. If communication is unavoidable, any discussions regarding the breach should be limited and should be stated to be ‘without prejudice’. The use of this term may limit the effect of such conversations further down the line, however this cannot be guaranteed.

Secondly, the landlord must ensure that no sums or rent due under the lease are demanded or accepted. This is because by accepting these sums, the landlord is allowing the lease to continue and could therefore be accused of accepting any earlier breach by the tenant.

Final considerations – effecting forfeiture

In the event that a landlord believes it has the right to forfeit the lease, and it has preserved this right, what are the final issues which the landlord should be aware of?

Perhaps the primary consideration will be how the landlord will regain control of the premises. One way is by ‘peaceable re-entry’, however, before utilising this method, thought should be given to the practicalities of this, for example, is it possible to simply change the locks when the building is empty, or are the premises occupied by a commercial tenant who is likely to have individuals on the premises throughout the day? If an individual is present and/or objects, the landlord risks committing a criminal offence by changing the locks to the property.

Furthermore, following re-entry, a landlord should be aware that it becomes responsible for any goods remaining on the premises. The landlord must therefore be able to ensure the safety of any tenant’s property remaining on the premises, to avoid any subsequent claim from the tenant for loss due to damaged goods.

The alternative to re-entering the property is to issue court proceedings. This involves issuing forfeiture proceedings using the relevant claim form. A possible advantage to this is that it avoids the difficulties of re-taking possession; however it can be a lengthy process incurring additional legal fees.

Finally, a landlord seeking to effect forfeiture should be aware that a tenant has the right to apply for relief from forfeiture, via an application to the court. Therefore, even in the event that the landlord’s right to forfeit can be established, and the statutory procedure is followed, a tenant may still be able to remain in the property. In addition, relief may be granted even if the landlord has already re-entered the property.

Conclusion

The right of forfeiture, whilst a useful remedy, is not a simple one, both in terms of its establishment and its effect. This article has summarised some of the main issues and concerns which a landlord should be aware of, but highlights the importance of obtaining legal advice at the early stages of any potential exercise of the right to forfeit.

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[1] Such a notice must follow the requirements under section 146 of the Law of Property Act 1925.