How To Forfeit A Commercial Lease
What is forfeiture and why might a landlord elect to forfeit a commercial lease?
Forfeiture is a word dreaded by tenants and probably one of the most draconian remedies known to man when a tenant is in breach of their lease. In this article, we take a deep dive into the murky waters of commercial lease forfeiture and how it works in practice.
In legal terms, forfeiture is when a landlord retakes possession of premises from the tenant and terminates the lease. Different rules apply depending on whether the premises are commercial or residential, and this article focuses on commercial leases.
There are many commercial considerations to take into account for the landlord when they decide whether to proceed to terminate the lease by forfeiture. Ultimately, forfeiture is both a risky and complex process which is not to be embarked upon in a slapdash way. This is particularly the case when the breach of the lease is something other than default in rental payments.
The most common reason for forfeiture is non-payment of rent. However, the tenant may have also breached the lease in other ways, such as by allowing or carrying out illegal or immoral activities on the premises, unauthorised subletting, or causing damage to property.
Forfeiture can also be a risky and uncertain process when the tenant is in breach of their lease (other than default in payment of rent). The process the landlord will need to follow can therefore often be complex. It may also be the case that the tenant’s breach(es) of the lease can be remedied without the need to use the forfeiture route.
Must a forfeiture clause be contained in the lease or can it be implied?
The right to forfeit a commercial lease must be spelt out explicitly within the lease. It cannot be implied, which means there must be a specific ‘forfeiture clause’ or a ‘proviso for re-entry’. For example, the clause could require the landlord to provide notice and grant the tenant a period to remedy the breach.
What legal procedures must be followed?
There is a very specific procedure which must be followed if the breach of the lease is other than non-payment of rent. A notice must be served on the tenant by the landlord in accordance with Section 146 of the Law of Property Act 1925 (“Notice”). For the Notice to be valid, it must:
- specify the exact breach;
- require the tenant to remedy the breach if it is capable of remedy;
- require the tenant to compensate for the breach monetarily; and
- give the tenant reasonable time to remedy the breach.
Once the Notice has been served on the tenant, the landlord is entitled to peaceably re-enter the property or issue court proceedings seeking forfeiture if the tenant fails to satisfactorily compensate the landlord or does not remedy the breach of the lease within a reasonable time.
What is forfeiture of a commercial lease by peaceable re-entry?
Forfeiture by peaceable re-entry is not possible for breaches other than non-payment of rent.
Forfeiture by peaceable re-entry allows a landlord to take back possession of the property by physically entering it and changing the locks. Court proceedings are not required. Please note that, if the property is residential or mixed-use (residential and commercial), doing this could be a serious criminal offence and a landlord forfeiting such a lease using this method could find themselves liable to severe penalties such as arrest and imprisonment.
This approach is subject to specific conditions, including a requirement that the forfeiture and repossession are carried out peacefully and that the landlord has a legal right to forfeit the lease. As always, landlords must ensure that they have the right to forfeit the commercial lease in the first place and must comply with all legal requirements (otherwise they could be liable for unlawful eviction). Generally, it would not be advisable to consider going down this route unless the breach of lease is default of rent and/or the landlord is specifically granted in the lease to peaceably re-enter without a court order for the breach.
It is worth noting that ‘peaceable re-entry’ means ‘peaceable’. Reputable bailiffs who follow good practice processes (i.e., such as changing the locks at the premises and leaving prominent notices of what the landlord’s actions have been) should be instructed to deal with the peaceable re-entry.
What is forfeiture of a commercial lease by court proceedings?
The landlord can make an application to the court to seek possession of the commercial property if their tenant has breached the lease agreement. A section 146 notice would have needed to have been served first (as explained above).
The court will decide whether the landlord has the right to forfeit the lease. This method is generally more complex and can be more time-consuming than peaceable re-entry. However, court proceedings will be necessary if the tenant contests the landlord’s right of forfeiture and/or if the situation has certain complexities.
Depending on the value and complexity of the claim, either the County Court or High Court will be able to deal with forfeiture proceedings.
What issues do commercial landlords need to be aware of?
Given it is drastic action, forfeiture comes with risks for the landlord. For example, commencing court proceedings to forfeit the lease does not mean that an outcome in favour of the landlord is guaranteed.
The lease may not be forfeited if the court rules in favour of the tenant and such a ruling would also put the landlord on the hook for the tenant’s costs. Additionally, the court has discretion to grant the tenant relief from forfeiture which would mean that the tenant could retain the lease and continue to occupy the premises.
The tenant may also counterclaim for disrepair or breach of covenant from the landlord which would also significantly reduce the amount (quantum) of damages awarded to the landlord.
The landlord should also consider whether the tenant in breach could argue that the landlord has waived the breach (i.e., that the landlord has allowed the breach to continue and has by implication treated the lease as continuing). Imaginatively, this is known as ‘waiver’. For example, if a tenant has been paying rent late on previous occasions and the landlord has allowed this to happen. As always, if there is a risk of waiver, the landlord should exercise caution and seek competent legal advice.
What is relief from forfeiture?
There are a number of legal provisions which aim to prevent forfeiture from being used frivolously.
A tenant can apply to the court for relief to have the forfeiture set aside if the landlord has sought to end the lease by re-entering the premises following a breach of covenant by the tenant (and pursuant to the right reserved to the landlord to do so).
It is at the court’s discretion as to whether to grant or withhold relief, which is generally exercised in favour of the tenant if the tenant has acted quickly, paid any arrears, remedied any breaches of covenant and has paid the landlord’s costs. The court will also consider whether the landlord may have waived the breach.
There is a deadline of six months from the date of the forfeiture for the tenant to make their application for relief to the court. If more than six months have passed, it is open to the tenant to apply to the court for relief but the court will only consider it if there is good evidence to support the reason for the delay.
What factors should a landlord consider prior to deciding whether to forfeit or not?
When a tenant fails to pay rent or is in breach of their lease in some other way, this can be very frustrating for the landlord and they will obviously want to take some remedial action. Prior to going ahead with forfeiture, the landlord should often carefully consider the following:
- whether the tenant has violated the terms of the lease agreement (i.e., by subletting without permission, causing damage to the property, or consistently failing to pay rent). Such violations should always be documented;
- the prospects of re-letting the property in the event of repossession, which includes considering the current rental market conditions and the attractiveness of the property to potential new tenants;
- the financial situation of the tenant. For example, if the tenant is impecunious (or in financial distress), it may be challenging to recover unpaid rent or damages through legal action. The landlord will need to carefully consider whether pursuing legal action is likely to result in a successful collection of the arrears;
- a review of any measures for securities that have been put in place (i.e., any personal guarantee or rent deposit deed). These securities can provide a financial ‘cushion’ for the landlord in case of a tenant’s default;
- business rates implications will need to be considered if the commercial premises become unoccupied;
- costs of clearing and cleaning the commercial premises will need to be assessed if the tenant vacates after forfeiture, which may also include the disposal of abandoned belongings; and
- alternative solutions can also be explored before taking legal action, such as negotiating with the tenant for a payment plan or a voluntary surrender of the premises.
How we can help
It is imperative that you seek advice from a specialist commercial property solicitor, as failure to understand the process can expose landlords to damages claims for trespass and any losses suffered as a result of eviction if the forfeiture is carried out incorrectly.
If you require assistance with a matter pertaining to the forfeiture of a commercial lease, we would be more than happy to advise and guide you, working with you to ensure that your position is protected as far as possible. As always, we will ensure that your matter is dealt with efficiently, diligently and effectively.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.