The end of forfeiture?

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It is fair to say that reformation of the law of forfeiture has been a topic of discussion for many years; the Law Commission opened a consultation on the subject in 2004 and in 2006 published a report proposing that the current law be abolished and replaced by an entirely new statutory scheme dealing with the termination of leases following tenant default. The Law Commission’s view is that the current law is overly complex and can lead to injustice and is therefore in need of simplification and modernisation. In March 2015 the Lord Chancellor’s report on the implementation of the Law Commission’s proposals noted that the proposals were still awaiting a government decision and confirmed that it is intended that a conclusion on the subject should be reached during 2015. As such, it is possible that a further step towards reforming this contentious area of law may soon be taken.

Forfeiture: the current law in brief

In circumstances where a tenant has defaulted on its obligations under a lease, forfeiture enables the landlord to terminate the tenancy. Under the current law, forfeiture can take place either by a landlord issuing and serving possession proceedings or by them taking some other unequivocal action, for example, changing the locks, to demonstrate the termination of the tenancy (known as peaceable re-entry). If a tenancy is forfeited by either method, the tenant (or a sub-tenant or mortgagee) may apply to the court for relief from forfeiture which would have the effect of reinstating the tenancy.

The new proposals

The Law Commission have proposed that forfeiture be entirely abolished and replaced by a new statutory scheme which would provide for two forms of termination. The first, standard procedure would be court based and would sit along side a second, accelerated summary process which would replace peaceable re-entry. The new statutory scheme would apply to all tenancies, regardless of whether they were entered into before or after the scheme comes into force or whether or not the lease contains a forfeiture clause.

To utilise the standard procedure the landlord would be required to serve a ‘tenant default notice’ within six months of breach and not less than seven days before the termination claim. The default notice would need to specify what action should be taken by the tenant to remedy the breach and the time frame for that action. The notice would need to be served on not only the tenant, but also the holders of all derivative interests. If the tenant failed to remedy the breach the landlord could then commence action in the court. In circumstances where the court is content that a breach has occurred then it has the ability to make a number of different orders, including that the tenancy be terminated (albeit the order may be one requiring the tenant to remedy the breach).

The second procedure proposed by the Law Commission would permit a landlord to bring the tenancy to an end without the need to apply to court. As with the standard procedure, to utilise the summary procedure, the landlord must first serve a notice, in this case a ‘summary termination notice’. Again the notice must be served on the tenant and any subtenants, mortgagees, etc. The notice will bring the tenancy to an end one month from the date of service unless the tenant (or the holder of a derivative interest) applies to the court for a discharge of the notice. In the absence of an application to discharge the notice the landlord may regain possession of the property by, for example, changing the locks. If, however, an application is made to discharge the notice, the tenancy will only determine if the application is refused at which point the court may order that possession be given to the landlord. A landlord will only succeed against a tenant in a discharge application if they can prove that the tenant would, in standard termination proceedings, have no realistic prospect of avoiding a termination order being made by the court. If the commence the standard procedure in order to bring the tenancy to an end. Whilst the holder of derivative interest may no longer apply for relief they could apply to court for a post-termination order within six months of summary termination.

A happy ending?

Whilst the proposal for replacement of forfeiture by court action has generally been favourably accepted, the abolition of peaceable re-entry has caused controversy. Peaceable re-entry is generally seen as an effective remedy and the proposed summary termination procedure has a number of perceived issues which mean that the industry does not necessarily consider it a suitable alternative. It is not clear how a landlord could be aware that a tenant has made an application for a discharge order. It may take a considerable time for the court to process the application and serve it on the landlord thus turning a self-help remedy into one governed by the courts. This issue could be solved by a requirement for the tenant to serve notice on the landlord that an application has been made to the court. The summary procedure also gives tenants scope to occupy properties rent free whilst proceedings are brought in the court. Under the current regime where a landlord re-enters a property for failure to pay the rent the landlord will often let the tenant back into occupation pending a court hearing (as otherwise the tenant could make an application to court for an injunction). This means that currently the tenant will either have to agree to, or be required to, pay money on account of the rent while its application for relief is heard. Using the new procedure however the tenant could make an application for a discharge order regardless of whether it has any realistic prospect of termination being avoided. The tenant could therefore continue to trade from the premises even where there is no real prospect of it successfully contesting proceedings in court. This issue could be avoided if there was a requirement for tenants to pay sums due under the lease as a requirement of making an application for a discharge order.

The future

It is considered that the fact that modification of the law on forfeiture have been discussed for so long means that change is now inevitable. The current proposals however are not without their own issues and the summary procedure is considered to be particularly problematic. It is therefore hoped that the current review will be used by the government as an opportunity to iron out some of the issues so as to make the process more satisfactory.