Tenants in breach of their lease – Part 1: Can’t pay? Your Landlord may take it away.
In this 3-part series, we will consider what action landlords can take against tenants who have breached their lease, including a breach for non-payment of rent, in addition to breaches unrelated to payment of rent.
With crippling financial pressures, more and more commercial tenants are getting into financial difficulty. As a result, commercial tenants are persistently not paying their rent on time and landlords are reaching the end of their tether.
Generally, there are a number of options available to landlords when a tenant is in arrears. The option pursued by the landlord is dependent on what is right commercially for the landlord.
Part 1 of this series focuses on the option of forfeiture for landlords when their tenant is in rent arrears, and they wish to obtain possession of the property.
Landlords will wish to consider the following:
- Is the priority to obtain possession of the property and re-let the property to a new tenant?
2. Is the landlord happy for the tenant to stay and just wants to pursue the arrears?
(1) is attractive to landlords who have a tenant lined up and ready to take a lease of the property. Particularly if the local lettings market is buoyant, this is a good option.
(2) is a suitable option where there may be a longer void period because the local lettings market is not performing well, and landlords wish to maintain the continuity of receiving an income from a tenant already in situ.
Do you have a right to forfeit?
If landlords wish to obtain possession of the property, they should consider forfeiture by peaceable re-entry or by Court order. However, landlords need to be careful to ensure they have the right to possession, and they follow the correct procedure – otherwise they could face a damages claim by their tenant.
Both methods of forfeiture depend on whether the lease contains a forfeiture clause. Landlords should check if they have a forfeiture clause (standard commercial leases usually do). Most forfeiture clauses will permit a landlord to forfeit a lease (terminate the lease) where the tenant has breached its obligations e.g. for failing to pay rent, not using the property in accordance with the permitted use, failing to repair the property, allowing a third party to unlawfully occupy the property, or even when the tenant is subject to an insolvency event such as administration.
What breaches can you forfeit for?
Commonly landlords will forfeit for non-payment of rent. When forfeiting for this type of breach, a landlord can proceed immediately with either forfeiture by peaceable re-entry or applying to Court to forfeit the lease and obtain an order for possession.
In the case of breaches of lease (other than non-payment of rent), there is a statutory process landlords must follow before they can forfeit. This involves serving a Section 146 Notice on the tenant giving them a reasonable period of time to remedy the breach, failing which the landlord can proceed to exercise its right of forfeiture. As stated at the outset, the scope of this article does not include forfeiture for breaches of lease other than non-payment of rent.
Forfeiture by peaceable re-entry
If permitted by the lease, a landlord can forfeit by peaceable re-entry for non-payment of rent. It is very important to not only ascertain that the lease permits forfeiture, but also that the conditions which give rise to the right to forfeit are satisfied. This method involves a landlord physically re-entering the property and changing the locks. The very act of re-entering the property constitutes an act of forfeiture.
It is recommended that a landlord instruct a certified enforcement agent to re-enter the property, as they are aware of the procedure and possible pitfalls, which will help avoid a claim by the tenant for unlawful forfeiture.
Unlawful forfeiture
As mentioned above, a landlord is at risk of a damages claim if it carries out forfeiture by peaceable re-entry unlawfully.
Despite the pitfalls, the benefit of proceeding with forfeiture by peaceable re-entry is that it is quick and cheaper than going to Court. As a landlord, you will be responsible for the enforcement agent’s fees in addition to a locksmith’s fees and the costs of security (if this is necessary). Depending on the terms of the lease, a landlord may be able to recover these costs from the tenant in addition to its legal costs.
Forfeiture by Court order
Landlords may also apply to Court to forfeit a lease. Where a landlord serves the Court proceedings on the tenant, this indicates an intention to terminate the lease. The lease, however, does not actually terminate until the Court makes an order for possession. The period between serving the proceedings and waiting for the hearing for the Court to order possession is known as the ‘twilight period’ and a landlord cannot seek to enforce or rely on the tenant’s covenants within the lease during this period.
The benefit of obtaining a Court order for possession is that it avoids the technical pitfalls that face landlords when forfeiting by peaceable re-entry. The very act of having a Court order avoids any opportunity for the tenant to claim that forfeiture was unlawfully carried out by the landlord.
Can you recover arrears after forfeiture?
Whilst the scope of this article does not address recovery of arrears, landlords should note that following forfeiture, they are not precluded from recovering the arrears as a debt claim and there are a variety of options to do this, which will be covered in this series.
Relief from forfeiture
Landlords should be aware that even if forfeiture is successful and they have obtained possession of their property, the tenant has a right to apply to Court for relief from forfeiture, the effect of which is for the lease to be reinstated by the Court. Relief from forfeiture can only be granted by the Court and cannot be agreed between the parties.
In most cases of relief from forfeiture where the breach is non-payment of rent, the Court will grant relief to a tenant if the tenant has paid the arrears, the landlord’s costs of forfeiting and any interest that has accrued on the arrears. It is only in very exceptional circumstances that the Court will refuse relief and even proving the tenant’s impecuniosity is not necessarily enough to convince the Court to refuse relief.
Waiver of the right to forfeit
When considering forfeiture, as stated, it is essential to establish that the right to forfeit exists and any conditions to exercising the right to forfeit have been satisfied. It is also important to ensure that nothing has been done by the landlord that would operate as a waiver to its right to forfeit.
It is therefore imperative that when a landlord’s right to forfeit has arisen, they should not say or do anything which acknowledges the lease as continuing, for example by demanding rent.
Understanding how to correctly forfeit by peaceable re-entry is a minefield for landlords.
It is therefore necessary for landlords to receive quick and effective legal advice to navigate the pitfalls of forfeiture. Here at Taylor Walton, we can guide you through the process whilst ensuring your commercial priorities are always at the forefront of our advice. Contact us via our enquiry form here.
Disclaimer: General Information Provided Only
Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.
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