Is Forfeiture the Answer?

Local high streets, town centres and out of town retail parks are all sporting empty units as retailers continue to find market conditions tough. In the last 12 months we have seen some big names disappear such as House of Fraser, HMV and Better Bathrooms and we have seen other retailers reduce their portfolio by closing stores such as Marks and Spencer and John Lewis.

Commercial landlords will normally have an early warning when businesses are struggling as they will often default on rental payments. Depending on the terms of the lease, landlords may have the right to forfeit the lease for non-payment, bringing the lease to an end and giving the landlord an opportunity to re-let the property. But in these tough times is that the landlord’s best option?

Forfeiture

When a landlord forfeits a lease it basically terminates the lease. The landlord must have grounds to do this and must follow the correct procedure if it is to avoid a claim for breach of covenant by the tenant.

Grounds for Forfeiture

Non payment of rent tends to be the most common ground for forfeiting a lease but a lease can also usually be forfeited for other breaches by the tenant such as a repairing obligation. The terms of the lease are critical in establishing whether a landlord has the right to forfeit and any time constraints that must be observed e.g. generally a lease will state a specific length of time that the rent must be unpaid before the landlord can exercise his right to forfeit.

Once forfeited, the lease then comes to an end. This does not affect the landlord’s right to pursue the tenant for rent arrears or other damages.

Methods of Forfeiture

There are two ways that a lease can be forfeited:

• By peaceable re-entry
• By court proceedings

A landlord will normally retain the services of a bailiff in the case of a peaceable re-entry. The bailiff will attend the premises, change the locks and affix a notice to the premises confirming the forfeiture. There are strict rules regarding when this method can be used such as the property must be empty at the time.

For any other breaches, forfeiture must be done by issuing a notice to the tenant in accordance with section 146 of the Law of Property Act 1925.

Should peaceable re-entry not be an option e.g. because the property isn’t vacant, the landlord must apply for a court order to forfeit the lease.

If the tenant disputes the breach or is able to pay arrears in full plus interest and costs it may seek relief from forfeiture. If this is granted it has the effect of reinstating the lease.

Is forfeiture the most appropriate remedy?

Forfeiture may not always be the best option and the landlord needs to take many factors into account including the financial position of the tenant, the likely demand for the premises, its relationship with the tenant, whether there are other remedial options available such as seizure of goods pursuant to the Commercial Rent Arrears Recovery procedure (CRAR) before it makes its decision.

Once the landlord has forfeited, the lease immediately comes to an end unless the tenant is granted relief from forfeiture. The landlord then assumes responsibility for the cost of insuring the premises, the provision of utilities, other charges relating to the property such as rates and repairing and maintaining the property. The landlord will be out of pocket for the length of time that the premises are unlet. It may incur professional costs in reletting the premises and it may not be able to secure a tenant on as good lease terms as the previous tenant.

To avoid this situation, it is not uncommon for landlords to opt to try and preserve the relationship with the tenant and work with the tenant to remedy the breach, especially in the current economic environment. This may mean agreeing a payment plan for rent arrears or varying the lease to reduce the rent.

How can we help?

The property team at Bermans can provide legal and commercial advice to landlords on all aspects of the landlord and tenant relationship. The team can provide up-to-date credit reports on your tenants, so you can assess their solvency.

Bermans litigation team can also assist you in dealing with any landlord/tenant disputes.