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Relief from forfeiture: High Court case means more uncertainty for landlords

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28/07/2016

 

Forfeiture is a landlord’s ultimate remedy when a tenant is in breach of its lease. It enables the landlord to re-enter the premises, take back possession and bring the lease to an end.  In an uncertain market or economic downturn, there is generally an increase in the instances of tenant default and lease forfeiture.  However forfeiting a lease is a draconian remedy, which can have significant and far-reaching consequences for tenants.  It is therefore a step which is taken very seriously by the courts.  Add to that the fact that this is a complex area of law which is fraught with traps for the unwary, and it is easy to see why it is important for landlords, agents and tenants to have a clear understanding of some of the key the legal and practical issues.

A High Court decision, in the case of Pineport v Grangeglen [1], has resulted in further uncertainty for landlords on the already thorny questions of whether and when a tenant is entitled to relief (and, thereby, reinstatement of the lease) following forfeiture.  Walker Morris’ Martin McKeague review this recent case and offers some practical advice.

Forfeiture – A very brief reminder

There are various issues for a landlord to consider when forfeiture is on the cards, including: when does the landlord’s right to forfeit arise and are there any procedural requirements with which the landlord must comply; can the tenant take action to remedy the breach; has the landlord waived its right to forfeit (even inadvertently); can the landlord simply change the locks or is a Court Order required?

All such matters will affect the landlord’s ability to forfeit and the means by which forfeiture should be effected, and may also affect the possibility of relief from forfeiture being granted. For a summary of some of the key legal issues surrounding forfeiture, please see our earlier briefing [2].

Once a lawful forfeiture has taken place, however, whether by changing the locks to the premises (known as “peaceable re-entry”) or by pursuing court proceedings for possession, the lease comes to an end and the current tenant and any guarantor will be released from any further/ongoing liability [3].  In addition, any previous tenants/guarantors will be released from any further/ongoing liability and any subtenancies will also be brought to an end.

Relief from forfeiture

Relief from forfeiture is a remedy awarded by the courts to tenants or other interested parties which involves restoration of the lease just as though forfeiture had never taken place. Any derivative interests (such as subleases or the rights of mortgagees) will also be reinstated, which can affect the landlord’s future plans or dealings with the premises.  From a practical point of view, therefore, a landlord should consider, before it embarks upon forfeiture, where does this leave the tenant, any subtenants and any mortgages?

Whether and when relief will be granted will depend on a number of factors and the law and procedure differ according to the circumstances of the forfeiture itself. It is therefore necessary to consider the possible scenarios:

  • Relief from forfeiture in non-payment of rent cases where forfeiture was by court proceedings for possession.
    • The first point to note here is that, whilst both the County Court and the High Court have jurisdiction to determine an application for relief from forfeiture, the law provides that only in exceptional circumstances should proceedings be brought in the High Court [4]. The choice of court can be highly relevant because, as is explained below, there are different time limits and other requirements associated with proceedings in the County Court versus the High Court. A party should therefore make a proactive decision as to the court in which it wishes to issue proceedings, and it should be prepared to justify that decision to the court if needs be.
    • Sections 138 and 139 of the County Court Act 1984 provide that, in the County Court, a tenant’s application for relief from forfeiture must be brought within six months of the forfeiture (that is, the execution of the court order for possession), but that relief will then automatically be granted to the tenant if it pays all arrears and all costs of the court proceedings.
    • In High Court cases, sections 210-212 of the Common Law Procedure Act 1852 and section 38 of the Senior Courts Act 1981 provide that:
      • If there is at least six months’ arrears and if the tenant pays all arrears and costs of the court action within six months of the forfeiture, then the court may exercise its discretion to award relief.
      • If there is less than six months’ arrears then the six month limitation period for bring an application for relief does not apply and a tenant can bring an action for relief at any time. This results in great uncertainty for landlords.
      • Generally in the High Court, if a tenant is willing to pay all arrears and costs, the court will grant relief. However, the court can take into account other factors such as the tenant’s past history of payment, the relevance of any other breaches, delay, prejudice to other interested parties, and so on.
    • Sub-tenants and mortgagees can also apply to the High Court for relief from forfeiture pursuant to sections. 210-212 the Common Law Procedure Act 1852.
  • Relief from forfeiture in non-payment of rent cases where forfeiture was by peaceable re-entry.
    • In this scenario there is no automatic right to relief. Both the County Court and the High Court have jurisdiction to grant relief, but in the County Court an application for relief must be brought within six months of forfeiture; whereas, again, in the High Court, there is no limitation period for the bringing of a relief application.
  • Relief from forfeiture in other cases [5].
    • Section 146 Law of Property Act 1925 provides that where forfeiture has taken place, whether by court action or by peaceable re-entry, a tenant, sub-tenant or mortgagee may apply to the County Court or to the High Court for relief.
    • A tenant/sub-tenant/mortgagee may obtain relief at any time unless or until a landlord obtains a Court Order for Possession. There is therefore great uncertainty for landlords who forfeit by peaceable re-entry.
    • In these circumstances the courts have a very wide and unfettered discretion to order relief. The court can take into account any relevant circumstances, but generally the court is likely to consider (non-exhaustively):
      • the possibility of remedy/compensation to the landlord for the breach
      • whether the breach was wilful
      • whether the breach involves an illegal/immortal user
      • the gravity of the breach
      • the extent of the diminution in value of the landlord’s reversion, as compared with the value of the leasehold interest that is threatened with forfeiture
      • the conduct of the parties
      • the financial position of the parties
      • what form relief will take.

Pineport v Grangeglen

In the recent case of Pineport v Grangeglen a commercial tenant who had paid a £90,000 for a 125 year lease fell into arrears of rent. The landlord forfeited the lease by peaceable re-entry and then, some fourteen months later, the tenant applied to the High Court for relief.

Although there is no six month time limit for the bringing of an application for relief from forfeiture in these circumstances (as is explained above), it has hitherto been common practice for landlords and their agents and advisors to proceed on the basis that if no application has been made within six months or thereabouts, it is reasonable to assume either that no application will be made, or that a court would, as a general guide, view any application delay beyond six months as a factor significantly counting against, or even precluding, the granting of relief. It is easy to see why – otherwise a landlord could face indefinite uncertainty as to its ability to re-let or otherwise deal with the premises.

However, the High Court granted relief from forfeiture despite the significant delay. In exercising its discretion in this way the court took into account factors such as those referred to above. Of particular importance in this case were:

  • The persuasiveness of the tenant’s evidence explaining its reasons for the delayed application and the steps it was taking to remedy the arrears and to pay the landlord’s costs.
  • The relatively high value of the lease and the fact that a premium had been paid by the tenant, as compared with the relatively low value of the arrears and the fact that the landlord would effectively achieve a windfall if relief was refused.
  • he balance of prejudice suffered by the tenant if relief was not granted , versus the lack of prejudice to the landlord caused by the delay. (It was relevant, here, that the landlord had not actively sought to market or re-let the premises).

WM Comment and practical advice

Whilst this decision will no doubt dismay commercial landlords, it actually does no more than apply the existing law to the facts of a particular case.

In light of the complicated legal background to forfeiture and the risks and uncertainties associated with the granting of relief, landlords, agents and tenants should proceed with caution.

Certain situations in particular should set alarm bells ringing and should prompt the taking of immediate specialist legal advice. For example:-

  • Are you a landlord whose tenant is in breach of its lease? If so, is your priority to remedy the breach, or do you wish to recover possession (and potentially re-let or otherwise deal with the premises)?
  • If you are a landlord are you aware from the press or word-of-mouth that any of your tenants are in financial difficulties or likely to become insolvent?
  • If you are a tenant are you aware that your landlord has any desire to recover possession of your premises for some reason (potential redevelopment value, desire to operate its own business from the premises?) and are you in breach of any of the provisions in your lease such that there may be any scope for the landlord to forfeit?
  • Are you a landlord who has recently forfeited a lease and now wishes to re-let the property? Are you confident that the forfeiture was carried out lawfully and is there any risk of an application for relief from forfeiture upsetting your plans?
  • Are you a tenant whose lease has recently been forfeited? What was the breach in question, how was the forfeiture effected and are there any time limits to bear in mind if you wish to consider obtaining relief?
  • Are you a sub-tenant and if so are you sure that the tenant/your immediate landlord gained all requisite consents from any superior landlord before completing your sublease?
  • Are you a sub-tenant whose tenancy has fallen away due to the forfeiture of your landlord’s/the intermediate tenant’s lease?
  • Are you an agent or advisor to any client taking an assignment of a lease? If so, do you know whether there may have been any tenant default?
  • Are you or your client purchasing the business/assets of an insolvent company/individual and does the deal involve any leasehold property?

In all of these scenarios forfeiture, [inadvertent] waiver of the right to forfeit or an application for relief could represent a risk to your business. Properly managed, however, the forfeiture and relief process can help you to achieve your goals for your premises.

If you have any queries arising from the Pineport v Grangeglen case or indeed the law of forfeiture and relief generally, please do not hesitate to contact Martin McKeague, who will be happy to address any concerns and to guide you through the forfeiture or relief process.

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[1] Pineport Limited v Grangeglen Limited [2016] EWHC 1318 (Ch)
[2] Please see: The basics of forfeiture explained.
[3] That is, any liability from the date of forfeiture onwards. The landlord may still have a cause of action against the current tenant/guarantor in respect of the breach which gave rise to the forfeiture (for example a debt claim for any rent arrears or a dilapidations claim if the premises have been left in disrepair).
[4] High Court and County Court Jurisdiction Order 1991 and Civil Procedure Rules Part 55 and Practice Direction 55 para. 1.1.
[5] That is, in the cases of any breaches of lease other than non-payment of rent, whether forfeiture was effected by court proceedings or by peaceable re-entry.

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