Leading on from last week’s summary of commercial rent arrears recovery options, we will look at an overview of forfeiture for non-payment of rent in a commercial context. (NB the rules are rather different for residential properties).
What is forfeiture?
Forfeiture is the landlord’s ability to end a lease in the event that the tenant breaches a term of the lease or where another specified event takes place.
Can a landlord forfeit any lease?
There must be a valid forfeiture clause in the lease. This clause will specify when the landlord can forfeit the lease. If the lease does not include a specific forfeiture clause, the landlord will not be able to forfeit.
When can the landlord forfeit the lease?
Where there is a valid forfeiture clause, the landlord will be able to forfeit the lease in accordance with that clause. This will be usually where the tenant is in breach of another clause of the lease (e.g. has failed to repair in accordance with the lease), if specified events occur (e.g. on the tenant’s insolvency), or on non-payment of rent or other charges under the lease.
The landlord can either issue court proceedings, or ‘peaceably re-enter’ the property. This means to go in and change the locks. The choice is the landlord’s, and the best option will depend upon the circumstances of each case.
Forfeiture for breaches other than rent arrears
This is beyond the scope of this article, which concentrates on forfeiture for non-payment of rent. In brief, however, if the tenant is in breach of another term of the lease, the landlord will first have to serve a s146 notice on the tenant. This notice essentially puts the tenant on notice that, unless the breach is remedied (if this is possible), the lease will be forfeit.
Forfeiture for non-payment of rent
The forfeiture clause will set out at what point the landlord can forfeit for non-payment of rent. This is typically where the rent has been outstanding for 14 or 21 days. This article assumes that a typical forfeiture clause allows a landlord to forfeit where the rent is overdue by 21 days. On the 22nd day, the landlord can forfeit the lease.
Waiving the right to forfeit
On the 22nd day, the landlord must elect whether to forfeit the lease or not. He must decide whether to treat the lease as continuing, or that it has come to an end and that he will be forfeiting the lease.
By demanding or indeed accepting rent from the tenant, carrying out works to the property or even just talking to the tenant, a landlord could be said to be outwardly acknowledging that the lease continues. On the basis that the landlord is aware of the rent arrears, this will usually waive his right to forfeit. This means that he has lost his right to forfeit at this stage. Landlords must be careful of their actions at this stage to ensure they do not waive their right to forfeit.
That being said, the right to forfeit for non-payment of rent will arise again after the next rent becomes overdue. Of course, if rent is payable quarterly, a landlord may have a further three months to wait before he can forfeit the lease.
Relief from forfeiture
Where the lease has been forfeit, but the tenant is able to remedy the breach (i.e. pay the rent arrears), he may be entitled to relief from forfeiture. The idea is to put the landlord and tenant back into the position they would have been in had forfeiture not taken place.
Where the landlord has issued forfeiture proceedings in the County Court, the tenant has a right to automatic relief from forfeiture if he pays all arrears, interest and costs into court not less than 5 clear days before the first hearing. On this payment, the landlord’s claim ceases, and the lease is reinstated as if it were never forfeit. If the tenant does not obtain relief in this way, he has various opportunities to apply for relief later. The final opportunity being up to 6 months after the landlord has recovered possession.
If the landlord has forfeited by peaceable re-entry, the tenant may apply to the County Court for relief from forfeiture within 6 months of the re-entry. The Court will consider the application and will make an order for relief if it sees fit. The Court will ensure that payment of the rent arrears is a condition of the granting of relief from forfeiture. It will typically also require the tenant to pay the landlord’s costs.
Forfeiture or indeed relief from forfeiture proceedings can also be issued in the High Court, although this is rarer. The rules in the High Court are different to the County Court.
It is important to note that the above is merely an overview of what can be a very technical process. We recommend that, whether you are a landlord or a tenant, you seek early legal advice.