Deliberating the deliberate breach: new cases on relief from forfeiture
Author: Kirsty Black
Applies to: England and Wales
Two new cases confirm that the court has a wide discretion to order relief from forfeiture, even when the breach(es) of lease concerned are deliberate.
Commercial leases usually allow a landlord to re-enter the premises and forfeit the lease in the event of a breach of covenant. If exercised, the tenant can apply for relief from forfeiture, with such relief being at the court's discretion. The cases below confirm that the court must carry out a balancing exercise which gives proper weight and account to the reasons for non-compliance and that even recurring 'deliberate' breaches will not necessarily preclude relief being granted.
Magnic Limited -v- Mahmood ul-Hassan & Nasim Akhtar Malik (2015)
The defendants operated a takeaway pizza restaurant from premises in Middlesex. Their lease obliged them to comply with the Planning Acts and allowed re-entry in the event of a breach of covenant. Planning permission was granted for the takeaway use subject to certain conditions, including a new fume extraction system being installed. The lease was internal only and so did not permit the erection of the external ducting needed for the extraction system. The defendants therefore could not comply with the permission, which then lapsed, but carried on their business regardless. Magnic issued possession proceedings to forfeit the lease. These were compromised by consent, relief agreed as being conditional upon (inter alia) new planning permission being obtained. A personal licence was granted allowing an existing vent to be used. The defendants failed to comply and Magnic again sought possession. At first instance, possession was ordered with the proviso that relief would be granted if the defendants ceased running their takeaway business by a certain date. The defendants appealed, which appeal was dismissed, but they continued running their business. Fresh proceedings were issued and forfeiture was confirmed. The defendants again appealed, submitting that the landlord would receive a windfall of £150k, being the value of the lease structure, if relief were not granted whereas the defendants would lose their livelihood. They said the judge wrongly exercised his discretion in refusing to extend the date by which they were required to cease the takeaway business in order to obtain relief, as a new planning application was still pending at that date. They argued their continuing to trade was not a deliberate and conscious flouting or non-compliance with the previous order; they had genuinely (albeit mistakenly) believed the court had extended the date for ceasing trading. The court of appeal agreed that the judge had found the non-compliance to be deliberate when in fact it was a mistake, and he failed to consider why trading continued past the ordered date. The appeal was therefore allowed and relief granted. The court said it would have been disproportionate and unjust for the defendants to have been deprived of their property for the error in question.
Friefeld & Anr -v- West Kensington Court Limited (2015)
The tenants were tenants under a headlease of 7 commercial retail units forming part of a block of flats in London. They had sublet one of the units to a Chinese restaurant without landlord's consent, in breach of the headlease. The restaurant caused a nuisance and annoyance to the local residents. At first instance the judge found the breach of the alienation covenant on which the forfeiture action was founded had been deliberate. Together with what the judge found to be the tenant's attitude to their responsibilities, he refused relief from forfeiture, finding that "the Freifelds demonstrated a cynical disregard for their own obligations under their lease". The tenants appealed. They admitted that the sublease was granted in breach of their lease but asked for relief to be given on condition that they be given 6 months within which to complete a sale and assignment of the lease, failing which it would be surrendered, and argued that there had been an injustice because the landlord gained a windfall of £1m-£2m as a result of the forfeiture. Permission to appeal was refused by the judge but later granted by the court of appeal. The court asked and held as follows:
1. Did the judge direct himself correctly about what had to be shown to obtain relief where the breach was deliberate?
No. Even where the breach was wilful, the question was whether the damage sustained by the landlord was proportionate to the advantage he would obtain if relief were refused. The value of the leasehold interest is a relevant consideration but it is not enough to find that the effect of forfeiture would be a windfall to the landlord; it is to be balanced with all other circumstances. The judge failed to do this and should have considered that there should be no forfeiture if the leasehold interest could be sold on suitable conditions.
2. If there was a misdirection, what order should be made?
The tenants be granted relief from forfeiture for the purposes of and conditional upon the sale of the headlease interest within 6 months, failing which the order dismissing relief would be effective.
These cases confirm the court's view that the risk of forfeiture is not intended to operate as an additional penalty for breach, and that although the court will take account of any windfall to the landlord likely to be caused by forfeiture, this will not give tenants carte blanche to breach their lease covenants. Forfeiture is an ultimate sanction designed to protect the landlord reversion from continuing breaches and to secure performance of covenants. In most cases, relief will be granted on the breach being remedied and on terms as to costs and the court will take all of the circumstances into account.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.