"The act of re-entry must be unequivocal. Merely securing the premises will not be sufficient; there must be a physical re-entry of the premises, which is usually done by changing the locks or stringing up a chain to prevent access to open land at the rear of the premises"
- Mustafa Sidki - Thackray Williams
The well-documented increased business costs – employers’ National Insurance, National Living Wage, utilities and non-domestic business rates – unfortunately look to be coming home to roost. As we approach the Q2 rent date, I am being contacted by numerous commercial landlords whose properties are occupied by bars, restaurants, hairdressers and retailers, who have been advised by their tenants that due to these increased costs, they will not be able to pay Q2 rent on 25 June.
Where does this leave commercial landlords? Should they forfeit the lease with a view to converting their building into residential premises? Or would they be better off losing their right to forfeiture to avoid having to pick up the rates, insurance and utilities on an empty property?
The answer, as always, depends on individual circumstances, particularly whether there is any realistic prospect of the tenants being able to pay arrears and/or regularise matters going forward.
But for any landlord in this situation, there are important legal considerations to understand and weigh up before deciding on the best appropriate action.
Landlords’ rights of forfeiture
Forfeiture or re-entry is the landlord's right to determine the lease where the tenant is in breach of any of its obligations under the lease or on the occurrence of certain events specified in the lease, such as the tenant's insolvency.
Forfeiture represents a final and positive act that the landlord cannot retract. Any action taken must, therefore, be unequivocal and demonstrate an intention to forfeit. It is also important that the landlord communicates their act of forfeiture to the tenant.
Waiving the right of forfeiture
Waiver of a right to forfeit occurs when a landlord does some unequivocal act that recognises the continued existence of the lease, such as demanding or receiving rent. While this bars the remedy of forfeiture, such as the right to re-enter the premises, the right to damages for the breach remains intact; in the case of non-payment of rent, the landlord retains the right to demand the rent arrears are made good.
However, there may be situations in which a landlord is willing to accept a breach (such as non-payment of rent in one quarter) to retain the tenant, particularly if they can show that they will be able to make future payments, and/or to avoid the costs of an empty property. This would constitute a waiver of breach of covenant, based on the inference of the landlord’s consent to the breach.
Significantly, such waivers do not bar the landlord’s remedies in respect of subsequent breaches, such as the non-payment of rent for a subsequent quarter. If the tenant failed to pay their rent on a second occasion, the landlord’s right of forfeiture and the right to damages for the second breach are reinstated.
If a landlord decides that the best commercial decision is to exercise their right of forfeiture, they can effect re-entry by either peaceable re-entry or by proceedings, subject to important legal limitations.
Forfeiture by peaceable re-entry
Forfeiture by peaceable re-entry will terminate the lease (subject to any claim for relief by the tenant or any third party with an interest in the tenancy – see below).
The landlord must ensure the right to forfeit has arisen before effecting peaceable re-entry. Leases usually specify a period between the breach and the right to forfeit arising, typically 14 to 28 days.
The act of re-entry must be unequivocal. Merely securing the premises will not be sufficient; there must be a physical re-entry of the premises, which is usually done by changing the locks or stringing up a chain to prevent access to open land at the rear of the premises.
Immediately after the re-entry, a notice stating that re-entry and forfeiture have taken place must be prominently placed on the property; there is no prescribed wording for this notice. If there are any tenant's goods in the property at the time of the re-entry, the landlord may find itself a bailee of those goods, which may give rise to insurance issues or claims for damages from the tenant.
Peaceable re-entry for breaches other than non-payment of rent
If a breach is for something other than non-payment of rent, a section 146 notice would need to be served before peaceable re-entry, giving the tenant a reasonable time to remedy the breach, if it is one that is capable of remedy. Some of my clients are telling me that their tenants are not keeping their properties in a good state of decorative repair, as they cannot afford to do so.
Important limitations to peaceable re-entry
There are significant limitations to peaceable re-entry; breaching them can constitute a criminal offence:
· Residential premises: Peaceable re-entry should not be used in cases of residential premises as a criminal offence may be committed by wrongful re-entry (sections 1 and 2, Protection from Eviction Act 1977 PEA 1977)). A landlord of residential premises who wants to forfeit the lease should obtain a court order for possession under CPR 55. The same position will apply to mixed-use premises, as part of them will be occupied for residential purposes. Many enquiries we receive are for properties where the tenant has leased the whole building, but they are supplementing their income by subletting residential parts to either their staff or others.
· Use of force: Peaceable re-entry means peaceable to the person and not the property, but excessive force to enter the property must not be used. A criminal offence will be committed if violence is used to gain entry and there is someone physically at the property who is opposed to the re-entry. These restrictions mean peaceable re-entry is often carried out at commercial properties outside of working hours to ensure that there is no one at the property, so no offence can be committed.
Forfeiture by proceedings
It is also open to landlords to issue proceedings for forfeiture of a lease, an unequivocal act which manifests the landlord's intention to forfeit the lease. However, the lease terminates only once the court makes the judgment for possession (by contrast with forfeiture by peaceable re-entry, where the forfeiture takes place when the re-entry occurs).
The ‘twilight period’ of forfeiture by proceedings
The period between service of the proceedings and when the court makes the judgment is known as the 'twilight period'. In serving proceedings, the landlord has effectively elected to treat the lease as at an end; this means that the legal relationship, responsibilities and rights between the landlord and the tenant shifts:
· Other breaches under the lease: The landlord is no longer entitled to rely on any breach of the tenant's covenants committed after the date of service (Jones v Carter [1846] 15 M & W 718; Associated Deliveries Ltd v Harrison (1984) 272 EG 321). The landlord is only able to bring a claim against the tenant for conduct committed during the 'twilight period' if that conduct also gives rise to a claim in tort.
· Payment for continued occupation: The landlord should demand mesne profits, not rent, for the tenant's continued occupation. The landlord might, in those proceedings, apply for an interim payment under CPR 25.7(1)(d).
· Ongoing tenants’ rights: While the landlord has legally treated the lease as at an end by serving proceedings, the tenant has not. The Court of Appeal has held that during the ‘twilight period’, tenants can still enforce the landlord's repair covenants, since those covenants remain in existence pending the outcome of any application for relief by the tenant (Peninsular Maritime Limited v Padseal Limited (1981) 259 EG 860).
The pros and cons of peaceable re-entry by bailiffs
Some certified bailiffs offer a forfeiture service, but they will act as agents for the landlord. It is therefore important when instructing a third party to remind them of their duties, as the landlord will bear the ultimate responsibility if the peaceable re-entry is not exercised correctly.
Appointing a bailiff has both advantages and disadvantages:
· Advantages: Using a bailiff is both less expensive and quicker than court proceedings. The onus is on the former occupier or tenant to issue a claim against the landlord to prove why it is still entitled to possession and should be allowed back into possession.
· Disadvantages: The landlord may not be able to deal freely with the property if there is a risk that the former occupier or tenant may make an application to be reinstated in the property; if successful, they may also seek damages to recover any losses suffered from being deprived of the use of the property, which may be substantial if a commercial business has been adversely affected. The landlord may also have to deal with items left at the premises and may become an involuntary bailee with the obligations that the role entails.
Tenants’ rights for relief from forfeiture
Relief from forfeiture is a discretionary equitable remedy. It is available to a tenant or any third party with an interest in the lease, such as an undertenant or a mortgagee, after a landlord has exercised their right to forfeit the lease, either:
· As soon as a section 146 notice is served
· When proceedings are served, until the point at which a court order allows the landlord to take back possession of the property
· Following peaceable re-entry by the landlord until six months from the date of the forfeiture, which is when the time to issue a claim expires (sections 138 and 139 of the County Court Act 1984)
If a court grants relief, it will aim to put the landlord and the tenant back into the position in which they would have been if there had been no forfeiture.
With growing numbers of small businesses warning that they will struggle to pay their rent when it falls due, commercial landlords must ensure they understand their options and responsibilities for forfeiting the lease legally, and weigh that with the commercial considerations of having an empty property.
