Forfeiting commercial leases - your rights as a landlord and a tenant.  

If you are the landlord

Yes, that is correct. If you are the landlord of a commercial lease and your tenant has breached a covenant, you do not have the automatic right to re-enter the premises and take physical possession of them.  However, a well drafted lease should include a re-entry provision, in which case you can take the property back.

A forfeiture or ‘a landlord’s right to re-entry’ provision in a lease allows you to bring the lease to an early end and remove from the premises a tenant who does not abide by the terms of the lease, along with their possessions. Having a provision of re-entry in the lease can provide you with some security in the event the tenant does not pay their rent, illegally sublets or other breaches. 

Whether or not you want to take advantage of your right to forfeit or terminate the lease prematurely is up to you.  You might, for example, decide that despite the breaches, it’s better to keep the tenant in, rather than have the property empty and become responsible for business rates and insurance.

If you decide to forfeit the lease, this will mean that the lease will come to an end before its expiry date, although some clauses, such as the tenant’s obligation to carry out repairs at the end of the lease will survive.  Also, once a headlease is forfeited or terminated, any sublease will terminate with it although a subtenant has the right to bring a claim for relief against forfeiture. In addition, you will not be required to pay statutory compensation to the tenant when you terminate the lease by means of forfeiture if the tenancy is protected by the Landlord and Tenant Act 1954.

HOW DOES IT WORK – non payment of rent

If the breach is for non-payment of rent, you can forfeit the lease without the need to serve a notice as long as the specified period of time for the rent being overdue has expired, which will be set out in the forfeiture clause in the lease if there is one.  The best and most practical way to forfeit the lease is to send the bailiffs in, who will change the locks and secure the premise for you.  You can claim the costs back from the tenant.

You can also issue county court proceedings for the arrears of rent that has fallen due in the last six years.  Any rent before that period is irrecoverable.  This applies even if you have already forfeited the lease, for the period up to the date of forfeiture.

You may also have the ability to seize goods belonging to the tenant, to the value of the sum owed under the commercial rent arrears recovery. In making a claim for damages you might also be able to recover your legal costs.

HOW DOES IT WORK – breach other than non payment of rent

If the breach is for anything else, you need to serve a notice on the tenant.  In the notice, you will give details of the breach, what you want the tenant to do (usually remedy the breach if it’s capable of remedy) and by when and what you want in terms of compensation if that is adequate in the circumstances of the breach

On the other hand, you can choose not to forfeit the lease and forfeiture will be waived. For example, if after you found out about the breach and you demand or accept rent from the tenant, you are effectively forgiving them for the breach, so that your right to forfeit may be lost.  This will depend on the circumstances, so if your tenant has breached the lease, and you want to consider your options, don’t send them an invoice or accept any funds from them without taking legal advice first.

Even if you do take a step that means you have lost the ability to terminate the lease by forfeiture due to a breach that may not be the end of the matter.  For example, you may still have the right to apply for a court order to make or stop your tenant doing something, as well as damages.   Also, if the breach is ongoing (such as an illegal sub let) then even if you accept the rent, you may still be able to take action.

What to consider before you proceed

Before you decide whether to forfeit, issue proceedings or do nothing, it’s a good idea to carefully consider the market conditions at the time of breach.  It may not be in your commercial interest to terminate the lease, but may be better to issue proceedings, or wait to see what happens next. For example, in times of recession, finding another tenant who can pay the same rent without the property being empty for any period of time might not be an easy task.  On the other hand, if the property is in a sought after area, and the economy is good, you may be able to relet the property quickly and for more money, in which case forfeiting the lease can mean that you are able to quickly take back possession of your premises and let them out to a new tenant on more favourable terms

If you are the tenant

If you are the tenant and your landlord wants to bring the lease to an end because you are in breach, you can apply to court for relief from forfeiture within six months from the date of forfeiture. Generally, the court has a wide discretion on whether to grant the relief and will look at a number of different issues.  For example, your past history.  If you have been a good tenant throughout a long period of occupation, the court will look much more favourably on your application than if you have been in breach many times before.  They will also look at the value of the property, and what you can offer, such as bringing all the arrears up to date and paying the landlord’s costs. 

The good news is that if you can establish that your own loss arising out of the premature termination of the lease is going to outweigh the potential loss to the landlord, and that you can remedy the breach and compensate the landlord for their losses, then it is very likely that the court will grant the relief you have applied for.

Another important thing that you need to consider is that if you have sub-let the premises to a subtenant and the headlease is terminated, any sub-tenancy will terminate as well. If your application for relief from forfeiture is successful, the lease will be restored as though forfeiture had never taken place. In addition, any sub-lease will also be automatically reinstated. However, you will need to bear in mind that you will need to abide by any order that the court makes, such as paying any arrears, and if you don’t, the lease will not be reinstated. 

If you are the subtenant

If you are the subtenant and the headlease is forfeited, you can also apply for relief from forfeiture. If such relief is granted, you will become an immediate tenant of the head landlord.

Of course, the best thing to do is to try and stay on good terms with your landlord or head lessee and negotiate with them if things are going wrong.  If your tenant is in breach, consider talking to them about their conduct to see if an agreement can be reached before you decide what to do.  Whilst both landlord and tenants have legal rights, if legal action can be avoided, you could save time and money in the long run. If you are considering forfeiture proceedings against a commercial tenant, Express Conveyancing’s team of Online Conveyancing Solicitors would be able to assist.

 

Disclaimer – our articles are designed to give you guidance and information.  There is no substitute for proper direct advice, particularly as everyone’s circumstances are different.  If anything in this article may affect you, please contact us for advice that is specific to your circumstances.