Forfeiture

It is crucial for both landlords and tenants to have an understanding of their rights where a lease is terminated by forfeiture and the circumstances in which this may arise. Usually, a landlord can exercise its right to forfeiture where a tenant is in breach of its commercial lease obligations and the landlord wants to terminate the lease early.

A landlord can achieve this either by way of peaceably re-entering the property or by issuing possession proceedings. The consequence of forfeiture is that the landlord will take back possession of the property and the lease will be ‘forfeited’.

Waiver on forfeiture: Faiz v Burnley

Parties should, however, be alert to the fact that a landlord may be deemed to have waived their right to forfeit a lease in the event they accidentally or inadvertently treat the lease as continuing, with knowledge of the tenant’s breach.

Of particular significance is the Court of Appeal decision in Mohammed Majeed Faiz (1) Shakeela Faiz (2) and Sassf Ltd (3) v Burnley Borough Council [2021] EWCA Civ 55 which provided greater insight as to what the courts may consider will amount to waving the right to forfeit.

The facts

The Landlord, Burnley Borough Council (“the Council”), granted an excluded 10 year lease of a café at Towneley Hall, Lancashire. The lease included a clause that said insurance rent was payable within 7 days of demand.

On 26 September 2019, the Council issued a demand for insurance rent to the tenant for the period from 1 April 2019 to the date of the end of the lease. The insurance rent, in accordance with the lease, was due and payable on or before 2 October 2019.

It was disclosed by the tenants’ solicitors after the landlord had demanded payment of the insurance rent that a sublease had been granted which was prohibited by the alienation provisions in the lease. The sub-lease was not contracted out of the 1954 Act protection.

After the discovery of the sub-lease, the landlord served a Section 146 notice and a few days later, on 4 November 2019, issued a revised invoice for insurance rents calculated up to the date upon which the landlord became aware of the breach. Payment of the invoice was made by the tenants on 11 November 2019.

On 22 November 2019, the landlord purported to forfeit the lease by way of peaceable re-entry.

The Claimant tenant argued in the High Court that the landlord’s acceptance of the insurance rent on 11 November 2019 waived the landlord’s right to forfeit the lease, because the landlord had demanded and accepted payment after they had become aware of the tenants’ breach.

The decision

The Court of Appeal upheld the decision in the High Court, determining that the landlord had not waived its right to forfeit the lease.

The Court of Appeal considered two key issues which were key to its determination:

The first question was whether the landlord’s acceptance of rent after the breach had occurred, with knowledge of that breach, could waive the right to forfeit, in circumstances where (i) the rent in question had been demanded before the landlord had knowledge of the breach; but (ii) the rent was demanded after the breach itself; and (iii) the landlord accepted the rent after becoming aware of the breach.

In this regard, the Lord Justice Lewison considered that:

“[…] the principle is that waiver takes place where the landlord demands or accepts rent which accrued due after the date of a breach known to the landlord. Where the breach consists of an unlawful sub-letting (as in this case), I consider that the landlord must know not only that the sub-letting has taken place, but also that the rent demanded or accepted accrued due after the date of the breach”.

Accordingly, it was accepted the Landlord did not have prior knowledge of the breach when the first rent demand was made as the burden of proof in establishing the waiver lies with the tenants and in this instance it was held the tenants had not discharged this burden.

The second question was whether the revised demand for rent made on 4 November 2019 was a new demand for rent due after the landlord had acquired knowledge of the breach. The Court of Appeal held the revised invoice did not constitute a new invoice but was merely an acknowledgment from the landlord it was prepared to accept a lower amount for the rent than was previously demanded on 26 September 2019.

The decision in Faiz v Burnley provides welcome clarification for landlords on the issue of forfeiture, but also serves as an important reminder to be alert to the potential consequences of making lease demands without first checking whether a breach has occurred.

This case was later cited in Bedford v Paragon Asra Housing Ltd [2021] where the landlord’s knowledge of the breach and continued acceptance of rent proved fatal to its attempt to forfeit the lease.

The impact of the pandemic on forfeiture

During the pandemic, a moratorium (temporary prohibition) on forfeiture was enforced until 30 June 2021. Consequently, landlords were not able to forfeit a lease for non-payment of rent during this time.

During March to October 2022 the Commercial Rent (Coronavirus) Act 2022 introduced a legally binding arbitration scheme to resolve any rent arrears disputes between landlords and tenants. In effect, the scheme was intended to limit a landlord’s ability to forfeit a lease for arrears owed during the coronavirus pandemic. However, the scheme did not appear to be particularly popular, and was used sparingly during its short-lived timespan.

Since its expiration, there has been a steady return to forfeiture being the favoured option for landlords who are seeking to place pressure on tenants to pay rent in accordance with their leases.

What constitutes a waiver of the right to forfeit?

Landlords and tenants need to be wary of potential actions that could be cited as an acknowledgement that a lease is continuing, which may subsequently amount to a waiver of the right to forfeit.

This non-exhaustive list highlights the key actions to watch out for:

• Sending a rent demand for a new rent period after the date of the breach
• The acceptance of rent from the tenant
• Accepting rent from a third party on behalf of a tenant
• Payment to the landlord’s agent, even if the agent was not instructed to accept it
• Acceptance of rent “without prejudice” to the landlord’s right to forfeit, as “payment for use and occupation” or under protest. This will amount to a waiver, since actions speak louder than words
• Chasing arrears of rent by whatever means
• Exercising Commercial Rent Arrears Recovery (CRAR); and
• Discussing the surrender of a Lease.

The Hamlins Real Estate Disputes team has expertise in both commercial and residential matters. We seek to obtain the best outcome possible for every client, no matter how big or small the issue may be.

If you are a tenant or landlord with any questions about payments due under a lease, please email or call a member of the Real Estate Disputes team who will  be happy to help.