Commercial Tenancy Arrears: A guide to forfeiture
The scenario to be considered is a written lease between the landlord and tenant, and which sets out within it the express terms between the parties, including the requirement by the tenant to pay rent to the landlord in advance on a monthly or quarterly basis.
What exactly is forfeiture of a lease?
- Forfeiture is the termination or extinguishing of the lease.
- The landlord may terminate the lease early if the tenant falls into arrears, subject to the express terms in the lease.
- Tenant must find way to pay all the arrears, or vacate the property.
Has the right to forfeit arisen?
- Consequences of forfeiting the lease when the right to forfeit has not arisen can prove very costly for the landlord.
- Consider the specific wording of the lease. It should include:
- When the rent is due for payment;
- That the rent is due for payment without deduction or set off;
- That if the rent remains unpaid after 14 or 21 days (whether formally demanded or not) from the due date that the right to re-enter the premises and determine the lease arises.
- Forfeiture clause or the proviso for re-entry gives the landlord the authority to bring the lease to an end before the contractually agreed fixed period of the lease
- The right to forfeit arises after a specific period of time elapses after the payment due date.
- In the absence of ‘Without set off or deduction’ the tenant may defend the landlord’s right to forfeit if there is a valid counterclaim.
Beware of waiving the right to forfeit!
- Where the landlord’s right to forfeit the lease for rent arrears has arisen, the landlord must decide whether or not it will proceed to forfeit the lease.
- If the landlord acts in a way that is consistent with the continued existence of the lease the landlord is likely to have waived its right to forfeit for the breach committed by the tenant.
- Demand and acceptance of rent after the right to forfeit the lease has arisen as well as pursuing any other alternative methods of seeking to recover rent, can amount to a waiver.
- Waiver can occur irrespective of the intention of the landlord even if accidental, provided landlord is on notice.
Example
Rent is due for payment on the 1st of each month. The right to forfeit arises if rent is unpaid for more than 21 days from due date.
On 1 September rent is due but not paid by the tenant
On 1 October rent is due but not paid by the tenant
On 1 November rent is due but not paid by the tenant
On 25 November the tenant pays rent due in respect of rent due on 1 November.
Landlord accepts the rent allocated by tenant to November and seeks to forfeit the lease for the arrears of rent for September and October.
Can the landlord forfeit the lease based on the September and October arrears? No
If the landlord wished to forfeit the lease it should have returned any rent as soon as possible and taken action to forfeit the lease for arrears of rent for the months of September, October and November.
- The landlord’s acceptance of the rent is an act likely to be considered to be an unequivocal election to continue with the lease despite the previous arrears
- The landlord will need to look at alternative means of recovering arrears waived unless further arrears in future give rise to a further opportunity to forfeit the lease.
- It is not possible to contract out of the waiver principles by inserting a clause in the lease that any actions by the landlord are not to be considered a waiver of the right to forfeit the lease.
How do you forfeit the lease?
Peaceable re-entry
- Physically and peaceably entering the property and changing the locks by instructing a firm of certificated bailiffs
- Risk of existing waiver of the right to forfeit the lease
- Risk of possible criminal offences arising if there is any violence involving persons at the property who would oppose the re-entry.
- Prohibited to forfeit the lease by physically re-entering the premises when any part is let as a dwelling. This would include mixed commercial and residential premises, for example, a shop with a residential flat above.
Court Proceedings.
- Landlord to issue Court proceedings in the County Court and serve them on the tenant.
- An initial possession hearing is normally listed to take place one or two months after issue and service of the Court proceedings.
- Service of the proceedings on the tenant that signifies the election by the landlord to re-enter the premises and forfeit the lease. Thereafter, tenant is considered a trespasser.
- Claim damages for use and occupation of the property normally equating to the amount of rent that would be paid.
- Court order giving possession of the property to the landlord, to take effect in not less than 4 weeks from the date of the hearing, together with order for payment of rent arrears, interest, damages and costs.
- Bailiffs to enforce the order by attending and physically removing all persons from the property.
Relief from forfeiture in cases of non payment of rent
- If the Tenant pays the rent in arrears and costs of the proceedings not less than five clear days before the date of the hearing the tenant’s lease will be restored and will continue as if there had been no forfeiture.
- If within 4 weeks of Court order for possession the tenant pays all rent arrears and costs, then relief will be granted to the tenant and the lease will be restored retrospectively as if it had not been forfeited.
- Tenant can apply for relief within 6 months from the date the landlord recovers possession of the property. Court will have the discretion to decide whether to grant relief.
Anthony Best,
Partner
Harris Charalambous,
Solicitor