SPOTLIGHT ON FORFEITURE OF COMMERCIAL LEASES

In the context of commercial leases, forfeiture simply means termination of the lease by the landlord for some default on the part of the tenant.

With rare exceptions, the landlord needs to be able to rely upon an express forfeiture provision contained in the lease.  Forfeiture provisions are sometimes referred to as “re-entry” provisions or as “provisos for re-entry”.

Typically, forfeiture provisions apply where the tenant has been in arrears with rent for a certain period, where the tenant is in breach of any other covenant on the part of the tenant contained in the lease, or where the tenant has entered into an insolvency procedure.

Where a right to forfeit arises the effect is not to terminate the lease but to confer on the landlord a right to do so if a landlord chooses.

To forfeit the lease the landlord must do something which amounts to an unequivocal intention to bring the lease to an end.  There are two ways of doing that, either:

1. By peaceable re-entry; or
2. By issuing Court Proceedings claiming possession.

Peaceable re-entry involves securing the property physically, without going to Court.  In the case of a building this is usually a matter of changing the locks.  Landlords will typically post a Notice on the premises stating that they have recovered possession, to remove any potential for doubt.

However, Section 1(2) of the Protection from Eviction Act 1977 makes it a criminal offence to terminate a lease by peaceable re-entry if the premises are “let as a dwelling”.  If the premises have both commercial and residential elements the prohibition extends to the commercial part of the premises too.

In addition, Section 6 of the Criminal Law Act 1977 makes it an offence for a landlord to use force against a person or property in recovering possession of any premises, not just residential ones, so long as there is a person present on the premises who is opposed to the landlord recovering possession.

The effect of these provisions is to make it invariably the case that peaceable re-entry only applies to purely commercial premises and, to avoid anyone being present on the premises, it is usually effected by a bailiff over a weekend or early in the morning.

Forfeiture by Court Proceedings presents fewer risks.

However, there are two features of the law which are problematic in the context of forfeiture.

The first is waiver. It is easy for a landlord to waive its right to forfeit inadvertently and without even knowing that it had a right to forfeit.  Landlords have to be very careful about the risk of waiver.

Secondly, there is the question of relief from forfeiture.  There are rights for tenants, sub-tenants and mortgagees of the lease to claim to be relieved against forfeiture (broadly meaning reinstatement of the lease).  The rules are complex and not always predictable in operation. 

There are a number of commercial and practical issues for a landlord to consider before deciding whether to exercise the right to forfeit. Additionally, apart from a few exceptions (including non-payment of rent), where a landlord intends to forfeit a lease it cannot do so until it has first served on the tenant a Notice under Section 146 of the Law of Property Act 1925.

For further advice about forfeiture, or any other commercial property disputes, please contact the Dispute Resolution Partner at the Grantham office, Robert Clark.