Forfeiture of commercial leases: part three

In the final of my series of articles on forfeiture of commercial leases, I consider the 24 May 2024 Judgement in Tropical Zoo Limited v The Mayor and Burgesses of The London Borough of Hounslow which raised arguments as to whether the right to forfeit had been waived, in particular through the actions of the landlord’s agent. 

Consideration was also given to the possibility of the parties being able to contractually exclude the operation of the doctrine of waiver and the effect of demand of rent during the “life” of a notice pursuant to S.146 Law of Property Act 1925.

Relevant facts

The breach in question was of the unusual obligation to build a zoo and education centre within two years of the grant of the lease. With that obligation not having been fulfilled well after the two years had expired, on 16 February 2021 the landlord served  a S.146 Notice, requiring the tenant to remedy the breach within a reasonable time.  Pertinent actions thereafter were as follows:

• On the same day as serving the S.146 notice the landlord instructed its agent to no longer accept or demand rent from the tenant.

• No further rent demands were made, though the tenant continued to attempt to pay rent by making monthly payments to the agent until the end of 2022.All but three of these were promptly returned.

• Of those three, two were made on 18 March 2021 (during the life of the S.146 notice).  The agent tried to return these immediately having sought the account details of the paying account from its own bank, and instructing those monies to be returned. It transpired that the wrong account details were given by the agent’s bank and the error was not discovered until nearly eight months later, when the situation was rectified, and the monies returned to the tenant.

• A third was a payment made on 23 September 2022. The return payment was authorised within a week, but an internal error, compounded by persons leaving employment with the agent, resulted in it not being returned for over two months.

Waiver of forfeiture generally

Though not a landlord and tenant case, the court referenced the Court of Appeal’s comment in Tele2 International Card Company v Post Office [2009] EWCA Civ 9 in that “the general law demands that a party which has a contractual right to terminate a contract must elect whether or not to do so.”

With regard to leasehold forfeiture in particular, the court considered general principles, starting with the case of Matthews v Smallwood [1910] 1 Ch.777/786. It noted “… that waiver of a right of forfeiture of a lease will occur when two conditions are satisfied:  first, the landlord must know the facts giving rise to a right of forfeiture; secondly, with that knowledge, the landlord must do some “unequivocal act” which affirms the continuation of the lease.” 

It went on to note that “…the assessment of whether there is an unequivocal act of waiver is an objective question and the subjective motive or intention of the landlord is irrelevant, as is the tenant’s understanding of the legal consequences of the act”. That said, in respect of payments “… where a landlord accepts rent which accrues due after the date on which the landlord had knowledge of a breach of covenant, that will amount to waiver of the right to forfeit for that breach, even if the acceptance of rent by the landlord is accidental”.

In other words, the acceptance of rent by the landlord is “… all that counts” in assessing whether the right to forfeit has been waived.

Actions of the landlord’s agent

In this case, no payments were actually made to the landlord but to the landlord’s agent, and delays in repayment were contrary to express instruction and not known to the landlord. The court made two particularly interesting points on this subject. 

Firstly, in order for the agent itself to be able to waive the right to forfeit on the landlord’s behalf, it would need to have actual or ostensible authority to grant a new lease on the landlord’s behalf. In other words, it would need to have a full management function in relation to the property.

That was not the case here as the tenant had been advised by the landlord in respect of the agent that “… the property management treasury function will be outsourced … rents and other payments will be demanded and collected by [the agent]”. The tenant had been advised that the agent’s function was only in relation to collection of rent.

Secondly, the court noted that the limitation on the agent’s authority would be irrelevant if it could be said that the agent holding money constituted acceptance thereof by the landlord – such a delay in refusing the money might reasonably cause the tenant to believe that rent had been accepted. This was acknowledged as being a higher hurdle for the tenant to clear.

Though the tenant argued that neither the landlord nor the agent had expressly told it that rent payments were not being accepted and would be returned, it was given short shrift by the court. The tenant was aware (and had admitted as such) that rent payments were being returned. The tenant was described as evasive in answering the question as to why it continued to pay rent, when those payments were being returned, and the court had no hesitation in seeing this as a tactic, on the tenant’s part, aimed at engineering a waiver of the right to forfeit.

In March 2021 the agent had tried to return the payment. Its conduct did not involve the retention of payment, still less retention by the landlord. Four subsequent monthly payments were returned, and it was found that the tenant could not have been in any doubt as to the landlord’s position, even if it had not received the return of the March payment.

As to September 2022, the landlord’s/agent’s conduct over the preceding 18 months had been made clear to the tenant that payments were not being accepted.

The fact that the March 2021 and September 2022 rent payments had not been returned immediately did not establish that the payments were accepted by the landlord, so as to constitute waiver.

Whether the lease excluded operation of doctrine of waiver

Consideration was given to this as a result of clause 5.1.1 which allowed the landlord the right to forfeit “…(even if the landlord has waived any previous right of re-entry…)”. 

The landlord sought to argue that this clause could not mean that a new right of re-entry could arise if a previous right for a different breach had been waived, as that would be a case of stating the obvious. The landlord argued that the wording preserved the right to forfeit for a breach in circumstances where that right would have otherwise been waived.

Again, this was given short shrift. The court commented that “…it is commonplace for contracts to include provisions from an abundance of caution which may not, strictly speaking, be necessary.” Where an “…interpretation would mean that a particular provision is superfluous or repetitive [that] is merely one factor to weigh in the balance when considering the contract as a whole…”. In other words, lease provisions could very well be belts-and-braces.

Consequently, the court found no reason not to interpret clause 5.1.1 in its obvious, but completely superfluous, sense, stating that there was “…no presumption…” that necessitated an interpretation to be found which rendered the clause as something other than redundant. 

It would not be drawn as to whether it was impossible for parties to contract out of the principle of waiver, commenting only that “…the authorities [that had been presented] do not establish any such broad and general proposition”.

Acceptance of rent during the lifetime of the S.146 notice

As a fallback to the argument that the March 2021 rent payment was not received, the landlord sought to argue that acceptance of rent during the lifetime of the S.146 notice did not constitute waiver of the right to forfeit. In doing so it sought to rely on a case from the New Zealand Court of Appeal, seeking to assert that “… no election can be made and therefore no waiver can occur until there is a right to forfeit, which does not arise until non-fulfilment of the requirements of the statutory notice.” The court did not, however, accept the landlord’s argument on that point and decided that it did not need to consider it further as it had already decided that the landlord had not accepted the March 2021 and September 2022 rent payments and so there was no waiver of forfeiture.

The Birketts view

The doctrine of waiver applies equally to commercial as well as residential leases.

When dealing with forfeiture for once-and-for-all breaches, a landlord may already have inadvertently waived the right to forfeit by the time it seeks legal advice. It is therefore heartening to act for landlords who are not only aware of the risk of waiver, but have internal procedures in place for guarding against such waiver when it becomes aware of a breach. 

The landlord’s actions in Tropical Zoo in notifying the tenant of the scope of its agent’s role (being only the “treasury function”), such that it would be far less likely, though not impossible, for action or omission on the agent’s part to constitute a waiver, also turned out to be useful touch.

No decision was made on the questions of whether it is possible to contractually exclude the doctrine of waiver of ability to forfeit, or whether acceptance of rent during the life of a S.146 Notice operates as a waiver. Landlords are advised not to seek to rely on either possibility to achieve a favourable outcome. The cost of becoming involved in a dispute on either point is certain to be extreme.

If it wishes to rely on a forfeiture provision, payments made in respect of rent relating to periods following the breach, as well as the period within which the breach occurred, should be returned immediately. Though the action of doing so is likely to speak for itself (as was found in Tropical Zoo), there is no reason not to expressly advise the tenant that payments of what would otherwise be rent are no longer being accepted and would be returned.