Forfeiture: Did you know..?

Forfeiture: Did you know..?


Author: Patricia Mellody

The rules regarding forfeiture of a lease are not straightforward.

When a tenant has fallen into arrears of monies due under a lease, its landlord needs to navigate through the complexities of the law to ascertain whether forfeiture is available as a remedy.

Questions arising include: Has the right to forfeit arisen? Does a Section 146 Notice need to be served? Have adequate steps been taken to ensure there has been no waiver of the right to forfeit? Where the premises are residential, has the landlord obtained a court order?

Tenants of commercial premises do not want to lose profits from an inability to occupy and trade from the property -so forfeiture can be a cheap and powerful way of shocking a tenant into finding the cash to pay outstanding sums due.

Usually, when this happens, the tenant asks the landlord to let it back into the property. However, the case of Zestcrest Ltd v County Hall Green Ventures Ltd [2011] spells out the potential dangers to a landlord of letting the tenant back into the premises without going through the proper Court process to reinstate the lease.

The act of forfeiture is unequivocal; it terminates a lease. Once forfeiture is exercised, the landlord cannot then treat the lease as continuing unless relief from forfeiture is sought by the tenant from the court.

Relief from forfeiture is at the court's discretion and, if granted, the tenant will be entitled to occupy the property 'according to the lease without any new lease'. In effect, this means that the old lease will be reinstated.

Zestcrest Ltd v County Hall Green Ventures Ltd
Zestcrest was a tenant of commercial premises and had fallen into arrears of rent. The landlord, County Hall, forfeited the lease by peaceable re-entry.

After forfeiture had been exercised, the tenant paid the arrears. In spite of this, County Hall would not allow Zestcrest back into the premises until relief from forfeiture had been granted by the court.

The tenant issued proceedings for relief from forfeiture. The application for relief was not disputed and relief was granted. The pertinent issues were:
. Did County Hall act reasonably in requiring Zestcrest to issue proceedings for relief from forfeiture?
. Who should be responsible for the costs of the proceedings?

Judgment was awarded in favour of County Hall. The only means by which a forfeited lease can be reinstated is by an application being made to the court for relief under Sections 138 and 139 of the County Courts Act 1984.

Further, if County Hall had let Zestcrest into occupation before a court order had been granted, this would be likely to have amounted to the grant of a new lease. The original lease was contracted out of the Landlord and Tenant Act 1954.

Had the landlord allowed Zestcrest back into the premises and thereby created a new tenancy, Zestcrest would have obtained the benefit of security of tenure under the 1954 Act. This would have been prejudicial to County Hall.

Accordingly, the court held that County Hall had acted reasonably and Zestcrest should pay County Hall's costs of the proceedings on a contractual indemnity basis.

Why does this matter?
Once a landlord receives the money from a tenant after a lease has been forfeited, it is usually happy that it has achieved its objective: it has recovered the debt due to it.

Accordingly an unwitting landlord may be tempted to 'let bygones be bygones' and allow the tenant back into the premises. This could cause the landlord a greater headache later down the line, as such action is likely to constitute the granting of a new lease.

In circumstances where the original lease was contracted out of the 1954 Act and there were guarantors to that lease, if the tenant is allowed back into occupation and a new tenancy is thereby created, the landlord will unwittingly give the tenant the benefit of protection under the 1954 Act and lose the security of the guarantees.

In Zestcrest, the landlord was prudent, stood firm, and insisted the tenant take the appropriate steps to protect its position.

What should you do?
As landlord, if you have exercised forfeiture for failure to pay sums due under a lease and the tenant has then paid all sums due, do not act hastily and allow the tenant to reassume occupation. Consider the risks and consequences of such action and the likelihood of a new tenancy being created.

The safe course of conduct is to insist the tenant makes an application to the court for relief from forfeiture (or alternatively, that it enters into a new lease on terms acceptable to you) and, if in any doubt, seek legal advice.