Forfeiture of Leases

Top Issue in Landlord and Tenant Law

This article started as a top ten list of bullet points for landlords to think about. However, it has rapidly degenerated into a rant by the writer about one of his leading annoyances when trying to strike a balance between landlord’s rights and tenants’ concerns about what they are being charged. Sadly, or perhaps not, it has resulted in an analysis about an old chestnut:

Forfeiture – is it still the landlord’s most powerful weapon?

Forfeiture is a great way for a landlord to control a tenant. It is available for residential and commercial landlords and is a legal mechanism by which, if a tenant breaks the terms of his lease, the lease can be brought to an end.

The Court has power to grant relief from forfeiture. This means that if a tenant can offer terms on which a breach of covenant in the lease can be remedied within a reasonable time, the Court will allow him to do so.

Clearly, it is a mechanism which is open to abuse. Strangely, it is a rather unabused power. It is however a potent weapon when used to enforce covenants and particularly a covenant to pay rent or service charges.

The law does not allow eviction of a residential tenant without a Court order. That gives the lessee a lot of protection. For a commercial tenant, there is less protection. Even so, section 146 of the Law of Property Act 1925 requires a notice of intention to forfeit to be served on the tenant.

The breach of covenant must be specified and if it is remediable, the steps required to remedy it and a reasonable timescale within which to do so must be set out. In respect of unpaid rent there is no obligation to serve a notice. The commercial landlord is quite free to organise a “dawn raid” foe unpaid rent.

The landlord gets his remedy by instructing certificated bailiffs to effect entry out of business hours when the premises are unoccupied. The locks can be changed and it is for the tenant to make an application to the Court for relief which will involve him in either paying his rent arrears or putting forward an offer to clear them, perhaps by instalments, within a reasonable time.

The power is in the closure of the tenant’s business for at least a couple of days while a deal is done or while a hearing is arranged. Its real power is in making the parties face the issues and the relative strength of their respective cases on whether or not the charges should be paid.

Faced with a reasonable proposal which is likely to clear the debt, the Court will usually grant relief and the tenant will have to pay the landlord’s costs both of the forfeiture itself and of the application for relief. With sensible solicitors, the case need not go anywhere near a courtroom. An agreement will be reached, the tenant will be allowed back into occupation on terms and the lesson will have been learned...on both sides!

For the residential landlord, the law is very similar except that a claim for forfeiture must be made to the Court in every case. There is no dawn raid. Families are not put out on the street without a Judge’s approval.

However, forfeiture is currently a remedy which is out of fashion and the rules have changed for residential leases. There is talk of abolishing it altogether and there are already restrictions for low levels of arrears over short periods of time.

In particular a notice of intention to forfeit cannot be served unless there has been a determination by the Court or a Leasehold Valuation Tribunal (usually the latter because the Court will normally refer disputes to the LVT) on the issue of whether there has been a breach of covenant and on whether a service charge is reasonable.

Although the LVT is extremely good at this sort of thing, it is a nuisance. Previously, a notice could be served on a lessee and on his mortgagee. The mortgagee could take a view on whether or not there was a genuine defence to the claim. If there was not, the mortgagee would usually settle the claim and costs. The payment would be added to the mortgage debt and the lessee would pay it off as part of the mortgage debt. Now, the landlord has to pay the LVT fee, prove the reasonableness of a service charge and then apply to the Court for forfeiture.

It delays payment, increases the expense and puts the ball in the landlord’s court to prove that the money is due rather than leaving it in the tenant’s to prove that it is not. In the writer’s opinion, this is a retrograde step. The effect is to put the cost of the claim on the landlord and, through him, on to the service charge so that all of the lessees in the building have to meet the cost of pursuing the defaulting lessee.

Simply suing for the unpaid rent and service charges may look like a better option but ground rent under a long residential lease is typically low and the County Court will usually transfer a service charge claim to the LVT. It is very unsatisfactory and has the effect of making the compliant majority of lessees pay for the difficult minority who choose not to pay perfectly proper service charges.

Ironically, many of these cases involve freeholding companies set up by tenants who have acquired the freehold (often by force but that is another article) from a former landlord who was “only in it for the money” and which are quasi co-operatives operating for the tenant’s benefit. Sadly there are often some who genuinely suffer short term cash flow problems. In the vast majority of cases the right to buy company directors and members (usually the friends and neighbours or the defaulting tenant) will be prepared to tolerate this in the short term.

There are some who push this spirit of neighbourly behaviour beyond the limit and at some stage the non-resolving problem needs to be addressed. It costs those who manage their finances properly a lot of money. This is unsatisfactory. “Unsatisfactory” only starts to cover the point.

What can the landlord do in such circumstances? The beauty of the law is that it provides a multitude of options. The properly advised landlord whether a business, an individual or a “right to buy” company ought to be made aware of other routes towards settling the problem.

The law does not operate in a cage. Consider other approaches such as a statutory demand to bankrupt the non paying lessee. Even if it results in a fight, it puts the onus back on the defaulter and not on the landlord (and on the majority of lessees who meet their obligations and do not run up costs for the others) to show why the money should not be paid.

One of the few areas of hope for the professional landlord facing difficulties with service charge collection, is that some lenders, take a very pragmatic approach and when faced with a demand require the defaulting lessee to provide a letter from the lessee’s solicitor to show that there is a defence to a service charge claim. This is to be encouraged. It forces the lessee to think about whether short term benefit of gain of delaying payment is offset by the long term pain of paying more in landlord’s costs.

It also forces the lessee to spend some money now on a solicitor’s letter rather than forcing the landlord to incur the expense alone.

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