Commercial leases – tenant’s breach of covenants

Tenant breaches of lease covenants are a recurring challenge for landlords. Left unaddressed, they can escalate and impact both the landlord’s rental income and long-term investment.

Forfeiture

Forfeiture is a powerful (and many believe draconian) remedy for landlords when faced with tenant breaches of covenant. Essentially, forfeiture is the landlord’s contractual right to terminate the lease prior to its contractual end date, where the tenant is in breach of its lease covenant. The landlord then gains physical possession of the property. Care must however always be taken to ensure that the landlord does not inadvertently waive its right to forfeit and that the act of forfeiture itself is carried out lawfully. It is also important to note that once a lease is forfeited it cannot be reinstated without a court order.

Forfeiture – a contractual right

Forfeiture is a contractual right, there being no implied right to forfeit for tenant breaches of covenant. The right to forfeit must therefore be expressly set out in the lease itself. Whilst most modern leases include this right, this is not always the case and therefore the lease should be carefully checked to determine whether the right exists and if so in which circumstances it can be exercised.

How does the landlord exercise the right to forfeit?

There are two possible methods of forfeiture.

1. Peaceable re-entry

This applies to purely commercial premises, where there is no residential element. The process of peaceable re-entry usually involves instructing certificated bailiffs who are well versed in the procedure and will document the process in detail to ensure that any allegations of unlawful forfeiture can be properly met.

The re-entry takes place outside business hours to ensure that there is no one at the premises, as it must be peaceable re-entry. It is a criminal offence to use force whilst someone is in occupation.

The bailiffs will change the locks and place a notice at the property informing the tenant that the lease has been forfeited and providing details of whom to contact.

Expert advice should always be sought before taking steps to forfeit by peaceable re-entry so as to ensure that the landlord is not exposed to a claim for unlawful forfeiture which could lead to substantial damages being awarded to the tenant.

2. Court order

This is the safer option and in fact the only option, where the property is mixed use and so includes a residential element.

An application is made to the court for an order for forfeiture, setting out the breaches relied on.

Needless to say, whilst this is a more cautious approach, it is more time consuming and costly.  It is also usual for the tenants to make a claim for relief from forfeiture within those proceedings.

Can the landlord choose to immediately forfeit by peaceable re-entry in every case of breach where the property is exclusively commercial?

No, the process by which the lease can be properly forfeited is dependent on the nature of the tenant’s breach.

Non-payment of rent:

In the case of non-payment of rent, the landlord can proceed directly with peaceable re-entry as discussed above, if the property is solely commercial. If there is a residential component to the lease, then a court order must be obtained.

Non-rent breaches:

In the case of non-rent breaches, the landlord must first serve a notice in accordance with s146 Notice of the Law of Property Act 1925, clearly setting out the breaches complained of, asking the tenant to remedy the breach and giving the tenant a reasonable time to remedy those breaches. How much time is reasonable is rather dependant on the nature of the breach and the circumstances of the case. For example, in the case of an illegal user, it would be reasonable for the landlord to expect that such illegal user is ceased relatively quickly. In the case of disrepair, several months may be reasonable to allow the tenant to obtain quotes and thereafter have the work carried out.

Expert advice should always be sought to ensure that a valid s146 Notice is properly served on the tenant.

If the tenant fails to comply with the s146 Notice, the landlord can proceed with forfeiture.

Tenant’s application for relief from forfeiture

Unfortunately for the landlord, the act of forfeiture does not always bring the matter to an end as the tenant has the right to apply for relief by making an application to the court. When considering whether to grant the tenant relief, the court has a broad discretion and will take various factors into account, including the following:

1. Was the application for relief made in a timely manner?
2. Was the breach wilful?
3. Can the breach be remedied?
4. Is there a windfall to the landlord?
5. Are there any third-party interests?
6. All the other circumstances of the case.

Cautionary steps

Before forfeiting a lease, a landlord should always seek expert advice and the following points considered.

1. Is a right to forfeit for the breach provided for in the lease?
2. Have the necessary steps been taken e.g. s146 Notice?
3. Has the breach been remedied?
4. Has the breach been waived by the landlord?

Pros and Cons of forfeiture

Once the lease is forfeited, the landlord takes physical possession and assumes responsibility for the property. Certain factors should therefore be considered before deciding whether it is commercially worthwhile forfeiting the lease.

1. Is the landlord likely to secure a suitable new tenant easily?
2. What is the risk of squatters?
3. Liability for business rates
4. Dealing with tenant’s fixtures and fittings

Forfeiture is a useful tool for the landlord when dealing with tenant breaches however taking an incorrect step may result in a landlord waiving its rights to forfeit or, in the worst-case scenario, carrying out the forfeiture unlawfully, leading to the tenant making a claim for damages against the landlord.

Expert advice should therefore be sought as soon as possible to ensure that the landlord’s position is not prejudiced.

If you would like further information, please contact Meena Gupta, Partner in Birketts’ property disputes team.