Tuesday, 31 January 2012

There’s Too Much Confusion – I Can’t Get No Relief

The second line of Dylan’s much-covered All Along the Watchtower may not have been inspired by landlord and tenant law, but it serves as a good accompaniment to a recent case on forfeiture of a commercial lease.

Most commercial leases give the landlord the right to forfeit (take back) the lease from the tenant if it doesn’t comply with its terms.

The right will usually be set out in the lease and normally arises if the tenant fails to pay the rent, breaches a covenant or (unless the lease is to be used as security for a mortgage) becomes insolvent.

The landlord can forfeit the lease by peaceably re-entering” the premises and changing the locks; or by issuing proceedings for forfeiture, usually in the County Court.

Forfeiture however can be something of a pyrrhic victory for a landlord in a recession; after all, getting back empty premises is not much use if there’s no one else out there to take them on instead. It might just result in the landlord being left with an empty rates liability.

Equally, a tenant might welcome forfeiture and consider itself well rid of the lease burden.

But what if the tenant wants to stay?

Tenants are usually able to apply to the court for relief from forfeiture if they are able to show they can comply with the lease obligations. If the tenant succeeds, it gets the lease back, although it will usually have to pay the landlord’s legal costs.

What if the landlord, especially if there’s no one else on the horizon, is persuaded it should allow the tenant to stay?

Can the landlord itself grant relief?

Not if it wants the old lease back.

In Zestcrest Limited –v- County Hall Green Ventures Limited (reported in the Estates Gazette for 17th December 2011) the County Court confirmed that a private deal done after forfeiture has taken place without going back to the court is treated as a new lease. 

What’s wrong with that?

Well, unfortunately it can have some unwelcome knock-on effects for you as a landlord.

For example, if the lease that has just been forfeited was excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act) (which otherwise gives business tenants rights to renew their lease at the end of the term), the implied new lease would not be.

Avid readers of Digging the Dirt may recall this is similar to the situation where a tenant serves a break notice, then changes its mind and decides to stay with the landlord’s blessing – in which case the law implies a new lease has come into effect.

For more about the dangers of unintended consequences when new leases are implied in circumstances like these, see my post of a year ago – Lease Break Clauses: What If You Change Your Mind?

So, even if both parties decide to set the forfeiture aside, there has to be an application by consent to the court for relief.

Once the court makes the order, the lease is treated as though it had never been forfeited in the first place and it carries on as before – so if it was excluded from the 1954 Act, for example, it stays excluded.

As it happens, in the Zestcrest case, the tenant did make an application to the court for relief (because the landlord insisted) but then said that it was unreasonable to have been forced to do so by the landlord and that the landlord should reimburse the tenant’s costs. 

The tenant failed with that argument and the court said it was essential for the landlord, in view of the fact that the original lease had been excluded from the 1954 Act, to have formal relief from forfeiture.

Now, there must be some way out of here...

1 comment:

  1. The following comment from Mark Shelton on LinkedIn clarifies the position regarding mortgagees/subtenants, for which I am grateful (I also agree with him about Hendrix!):

    "I'd only add that if a mortgagee/sub-tenant is granted relief under s.146(4) LPA 1925, the effect is not to restore the lease as if it had never been forfeited - contracting-out would have to be dealt with as one of the terms of relief.

    In my head, it's always Hendrix, not Dylan... "