Commercial lease forfeiture

In uncertain economic times, commercial landlords are often faced with a dilemma. If the tenant stops paying rent should the landlord retake possession of the premises and terminate the lease? In legal terms, this is known as forfeiture. There are many commercial considerations as to whether to proceed to terminate the lease by forfeiture. The decision is rarely straightforward.

Where the breach of the lease is something other than default in paying rent, forfeiture is risky and the process a landlord will need to follow can be more complex (see below)

Key considerations for landlords – forfeit or not?

Of course it’s extremely annoying and unsettling to have a tenant in your premises who is not paying you or damaging your interests in some other way. However, forfeiture creates other potential problems for landlords, especially with retail premises outside of prime locations. There also may be alternative options for pressuring the tenant to remedy default.

Typically, landlords will want to carefully think about :-

• The risks of allowing the tenant to remain in the premises – for example, has the tenant unlawfully sub-let or damaged the premises, in addition to not paying rent?
• How easily could the premises be re-let if the landlord repossesses?
• What is the likely financial situation if the tenant? Would suing for losses be likely to result in the tenant paying?
• Are there available forms of security to go against such as a personal guarantee? What level of rent deposit does the Landlord hold?
• What’s the position in terms of business rates if the premises become unoccupied?
• If the tenant simply disappears after forfeiture, what would be the costs and complications of clearing out the premises?

Immediate re-entry or court application and order?

There are 2 key considerations for landlords who are considering taking back possession of the premises without a court order. Generally speaking, it is highly inadvisable to consider doing this unless the breach of lease is rent arrears and/or the lease specifically grants the landlord the legal right to peaceably re-enter without a court order for the breach which has occurred.

Even where both of the above apply, a Landlord should consider whether there might be any argument that he/she/they have in some way waived the breach. The most common example is where a tenant has previously been late in paying rent and the landlord has allowed that to happen. If there is a risk of waiver, caution should be exercised.

Peaceable re-entry is quicker and generally less expensive than court proceedings. We strongly recommend that when peaceably re-entering this should be done by reputable bailiffs who will follow good process including changing locks and leaving prominent notices of the Landlord’s actions at the premises. Under no circumstances should a Landlord use violence if someone is at the property and attempts to stop re-entry.

Court process for forfeiture

The process for applying for a court order for forfeiture involves serving a specified, statutory notice first, known as a section 146 notice. As advised above, for breaches other than non-payment of rent, the court process is necessary. In using the court application method, the tenant will be notified of the proceedings and this has the advantage whereby if the tenant simply ignores the court, any attempt to apply for an order for relief from forfeiture (see below) will be very difficult.

Tenant application for relief from forfeiture

If the Landlord has forfeited the lease, likely due to non-payment and without a court order, the tenant can apply to effectively reverse the order, claim costs and potentially damages for losses incurred. In deciding whether to make an order granting relief to the tenant the court takes into account :-

• The tenant’s behaviour
• How quickly has the tenant applied for relief?
• Has the tenant attempted to remedy the breach?
• Is there any evidence that the Landlord may have waived the breach?