Commercial leases: the pitfalls of forfeiture

Commercial leases: the pitfalls of forfeiture

Published:

Author: Oliver Spicer

Forfeiture is a common and cost-effective method of terminating commercial leases, but is not always the best course of action.

Criminal liability, claims for relief from forfeiture and financial loss are possibilities if a lease is forfeited incorrectly or is poorly timed.

Here, we shine a cautionary light on the major pitfalls of forfeiture.

Property markets and timing
. Forfeiting or terminating a lease in a weak market may leave the landlord with a vacant property which it is unable to sell or re-let. The result is lost rental income and also acquiring the liability as an occupier for all the financial liabilities for the property, including rates, utilities and maintenance.

. A property is more likely to fall into disrepair and suffer vandalism if left vacant. Not only can this dramatically reduce the value of a landlord's investment, if a landlord has additional properties in close proximity, it is likely these will also be devalued by association.

. In re-taking possession of a property, the landlord also re-takes liability for its physical order. A landlord may be liable for injury and/or damage to third parties, including vandals/trespassers and their property if sufficient safety precautions and preventative measures have not been taken.

Forfeiture: The correct procedure
. Forfeiture can be effected by peaceable entry or via court proceedings. It is vital to know which action is appropriate and that the relevant procedures are followed.

. When peaceably re-entering, it is best practice to use bailiffs, on legal advice, and to effect re-entry outside office hours, when the premises should be empty.

. Remember that different procedures apply in cases of non-payment of rent and non-rental breaches (e.g. repairing obligations). Forfeiture may not be effected in latter cases unless appropriate notice under Section 146 of the Law of Property Act 1925 has been served.

Criminal liability
. Mixed use occupation: Where premises is known to include residential parts, forfeiture by peaceable re-entry is unlikely to be an option, unless the landlord is certain that the residential occupiers have vacated. Otherwise, landlords must comply with the Protection from Eviction Act 1977 and bring court proceedings for possession in order to avoid criminal liability.

. Threats of violence: In effecting forfeiture by peaceable re-entry or court enforcement, violence must not be threatened or used against either the occupant or the property. To do so is a criminal offence under the Criminal Law Act 1977.

Waiver of the right to forfeit
. The landlord must ensure that it does not do or say anything to waive its right to forfeit the lease. Waiver is committed if the landlord (or its agents) does anything that acknowledges that the lease is continuing and this action is communicated to the tenant. This does not waive the breach itself, but will waive the right to elect to forfeit: express recognition of the continuing lease is inconsistent with an intention to bring the lease to an end.

. If forfeiture is attempted despite waiver, the tenant may bring a claim for wrongful forfeiture and seek damages for losses arising from the tenant's exclusion from the premises.

Summary
If the correct processes are not followed or a lease is forfeited at the incorrect time, the cost and legal ramifications for a landlord can be catastrophic.

In certain circumstances allowing a breach of lease condition to continue may be preferable to forfeiting. In other cases, strict processes must be followed in forfeiture to avoid liability.

The decision to forfeit or terminate a lease must be taken very carefully with specialist legal advice.

Shoosmiths' property litigation team has a wealth of knowledge to guide clients and to assist them in achieving their goals with the minimal possible risks and costs. We also advise tenants who are on the receiving end of attempts to forfeit their lease.