Forfeiture of commercial leases: part two
1 August 2024
Whereas the first article of this series dealt with breach by the tenant of the covenant relating to the use to which the premises could be put, the matter of Vanessa Tanfield (as Executor of the estate of Paul Watkins), Vanessa Tanfield and Dentons & Co Trustees Ltd (as Trustees of 2 Sipps) v Meadowbrook Montessori Ltd concerned breach of obligation to pay rent.
Relevant facts
There was a complex background and judgment was made during the course of the landlord’s petition for the winding up of the tenant, and the court only considered matters to the extent necessary to deal with that petition, though in brief:
– The tenant ran a school from the property and was in arrears of rent.
– On 21 April 2023, the landlord sought to forfeit the lease by physical re-entry (instructing a locksmith to attend early one morning and change the locks on the school) – a process which is ordinarily permitted, widely used, and does not require prior service of a s146 notice (as would be required for forfeiture for breach covenant other than payment of rent).
– Accordingly, 32 pupils arrived at school but were unable to enter, causing significant distress and confusion among parents and pupils.
– As of 4 July 2023, 15 of those 32 had received no formal education since closure of the school on 21 April 2023.
– The school argued that the purported forfeiture was unlawful on the grounds that no formal demand had been made for rent and, unusually, the lease did not contain standard wording providing for re-entry “whether or not the rent had been lawfully demanded”.
Judgment
The court found in favour of the tenant.
It noted that modern leases “almost invariably” do dispense with the necessity of a formal demand of the rent as a precursor to forfeiting but that, absent such wording, a formal demand is required. As there had been no such demand, the purported forfeiture by physical re-entry was unlawful.
Absent that clause, the landlord’s purported forfeiture was in fact an act of trespass.
Damages
The court went on to consider damages which, given the impact of the landlord’s actions on the tenant’s business, were significant. The main element was the loss of school fees for 32 pupils over the period of four terms from the date on which the locks were changed, until the date of the hearing (July of the following year). This alone amounted to £480,000.
Another head of loss was for conversion in respect of the tenant’s belongings in the premises (school furniture and equipment) which were either wrongfully sold or retained following the change of the locks.
To further add to the landlord’s expense, the court considered that Ms Tanfield wanted to get rid “…of the lease as quickly and cheaply as possible with a view to selling the Premises for personal gain.” It noted that exemplary damages could be awarded where the wrongdoer’s conduct had been calculated to make a profit exceeding the compensation payable to the claimant. The principle extends to cases in which the wrongdoer is seeking to gain at the expense of the claimant’s some object – perhaps some property which it covets which it could not obtain at all or could not obtain except at a price greater than what he wanted to put down.
It was found that the school was indeed entitled to exemplary damages as the landlord wanted to rid themselves of the lease as quickly and cheaply as possible with a view to selling for personal gain. However, the exact amount did not fall to be considered at that hearing. All with which the court was concerned was that the tenant’s claim against the landlord outweighed the rent arrears, such that the winding-up petition should be dismissed.
The Birketts view
The Tanfield judgment is a cautionary tale for landlords.
Forfeiture by peaceable re-entry for arrears is quick and easy, and a valuable weapon in the landlord’s arsenal. A landlord, who may be at the end of their tether with a non-paying tenant, may have used the process on a previous occasion without problem and could be all the more ready to rely on it again without seeking legal advice or carefully reading the lease.
Unlike forfeiture action for any other breach of lease, there is no requirement on the landlord to first serve upon the tenant a notice pursuant to S.146 Law of Property Act 1925 (giving the tenant a reasonable period to rectify the breach in-so-far as rectification is possible) where the breach is arrears of rent.
As the court noted, it is very unusual to find a lease which does not allow the landlord to forfeit by peaceable re-entry without the need for a formal rent demand.
However, peaceable re-entry remains a very bold step, and the damages that a tenant will incur as disruption to its business and recover from the landlord if there is a mistake in the process, are potentially very high even if, in most circumstances, a tenant would have applied to nullify the landlord’s actions much more quickly.
With that in mind, seeking legal advice before taking this step will be money well spent.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at August 2024.