Exercising a right to forfeit

As published in Estates Gazette, 24 August 2013.

This article explains the processes and limitations of ending a lease by forfeiture.

Forfeiture is a right given to a landlord to bring a lease to an end earlier than it would normally terminate, in the event of some default by the tenant.

It has always been the case that a landlord can only forfeit a long lease of a dwelling for breach of covenant, including non-payment of rent or service charge, if it contains a forfeiture clause. This is often referred to as a “re-entry” clause. Most modern leases will include an express forfeiture or re-entry provision.

In addition, section 2 of the Protection from Eviction Act 1977 states that where premises are let as a dwelling under a lease that is subject to a right of re-entry, it is not lawful to forfeit the lease while a person is lawfully residing there other than through the court. It is therefore generally not possible to forfeit a residential long lease by peaceable re-entry. Due to the wording of section 2 of the 1977 Act, the protection afforded by that section extends to mixed use premises.

The Commonhold and Leasehold Reform Act 2002 (the 2002 Act) placed yet further restrictions on landlords and the changes implemented by it significantly limited the use of forfeiture in relation to residential long leases (sections 166 to 172).

Statutory restrictions set out in the 2002 Act

Ground rent

Section 166 of the 2002 Act provides that a tenant under a long lease of a dwelling is not liable to pay ground rent unless and until the landlord has given notice of the amounts due. This is so even if the lease contains wording that rent is due “whether formally demanded or not”. As such, it follows that a landlord cannot forfeit a residential long lease for non-payment of ground rent unless a valid demand for the ground rent has first been served on the tenant in accordance with this section.

Section 166 is very specific and states that any demand for ground rent must be in a prescribed form and must contain certain information. It must also state a date when the tenant is liable to make payment and that date must not be:

  • less than 30 days nor more than 60 days after the date on which the notice is given, or
  • before the date on which he would have been liable to make payment in accordance with the lease (ie the due date under the lease).

For the purpose of section 166, “rent” does not include service charge or administration charges.

Level of arrears

There are also provisions in section 167 of the 2002 Act in relation to the level of rent, service charges and administration charges that must be outstanding before forfeiting a residential long lease becomes an option.

Landlords are limited in terms of forfeiting for relatively small sums that are unpaid for short periods of time. A landlord cannot forfeit a long lease of a dwelling unless the unpaid rent, service charge or an administration charge (or a combination of them) is an amount that:

  • is over £350; or
  • includes an amount that has been payable for more than three years.

The above limits are prescribed by regulations and may be subject to change in the future (although due to the provisions of the 2002 Act, the “lower limit” should never be above £500).

In addition to the monetary restrictions referred to above, in the case of non-payment of service charge / administration charges or breach of covenant, section 168 of the 2002 Act and section 81 of the Housing Act 1996 (the 1996 Act) set out additional conditions that must be fulfilled before a landlord can exercise his right to forfeit in these circumstances.

Service charges / administration charges (section 81 of the 1996 Act)

A landlord cannot exercise a right of forfeiture on the basis of a tenant’s failure to pay service charge or administrative charges unless:

  • 4  it has been “finally determined” by the First-tier Tribunal (Property Chamber), a court or an arbitral tribunal (in proceedings pursuant to a post-arbitral agreement), that the amount of the service charge / administration charge is payable by the tenant; or
  • the tenant has admitted that the service charge / administration charge is payable.

In the majority of cases, the tenant will not have admitted the breach and so it is likely that a determination would be required before forfeiture for non payment of service charge / administration charges is an option. This process can in itself be lengthy and expensive, particularly if the application is defended by the tenant.

Breach of covenant (section 168 of the 2002 Act)

In addition, a landlord cannot forfeit a lease on the basis of a tenant’s breach of covenant (other than non-payment of rent, service charge or administration charge) unless;

  • it has been “finally determined” by the First-tier Tribunal (Property Chamber), a court or an arbitral tribunal (in proceedings pursuant to a post-arbitral agreement) that there is a breach of covenant by the tenant; or
  • the tenant has admitted the breach.

As above, in the majority of cases there will be no admission as to the breach and so proceedings would be necessary in order to pursue forfeiture in these cases.

Section 146 notice

Following the “final determination” of an application in relation to breach of covenant, a section 146 notice containing prescribed information also needs to be served on the tenant.

In relation to service charge arrears, the Court of Appeal in Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258; was of the view that enforcement of a service charge liability was subject to the service of a section 146 notice even though the service charge may be reserved as rent. However, this finding conflicts with the earlier case of Escalus Properties Ltd v Robinson [1995] 2 EGLR 23, which held that a section 146 notice was not required in circumstances where the service charge was reserved as rent. This point will no doubt be the subject of future deliberations by the courts.

Generally, a section 146 notice cannot be served until at least 14 days have passed following the “final” determination of the matter.

The matter is “finally” determined through the First-tier Tribunal (Property Chamber), court or arbitral tribunal when either:

  • the period for appeal in the relevant court / tribunal has expired without an appeal being made; or
  • where an appeal is made, the appeal has been finally disposed of.

The section 146 notice should be in writing and should allow the tenant a “reasonable” time for the breach to be remedied. The circumstances of the breach will dictate what constitutes a “reasonable period”.

It is also worth noting that if the matter relates to a breach of the repairing obligation by the tenant, then in certain circumstances the landlord may also need leave of the court to forfeit due to the restrictions contained in the Leasehold Property (Repairs) Act 1938.

Possession proceedings on the basis of forfeiture

If a “reasonable period” has passed following the service of a section 146 notice and the breach has not been remedied, forfeiture proceedings can be issued by a landlord. The lease is effectively “forfeit” at the point that it is served on the tenant.

The tenant and / or his mortgagee then have the right to apply to the court for relief from forfeiture following on from which the matter will be listed for hearing. At the hearing the judge will either confirm that the lease is forfeit or consider any application for relief.

If relief is granted and the terms of relief are met, the lease will be reinstated. Alternatively, if no application for relief is submitted or the judge rejects the application for relief, the possession (on the basis of forfeiture) is enforceable in the usual way through the court.

Growing popularity

The process of forfeiting a long lease of a dwelling is far from simple and can be costly. To date such proceedings have been relatively rare but due to the current climate, forfeiture proceedings may become more common. It is therefore important that landlords are fully aware of this remedy.

Why this is important?

It is becoming increasingly difficult for landlords to recover arrears of rent, service charge and administration charges in the current climate. Whilst forfeiture in the case of a residential long lease can be a lengthy and expensive process, it is often now the only remaining option for a landlord to recover sums due under the terms of the lease.

As a result it is imperative that the proper steps are taken when considering whether to forfeit a residential long lease. The process is “front loaded” and so it is important to ensure that all of the earlier procedural steps have been carried out correctly in order to ensure that the right to forfeit is available.

In addition, landlords can be faced with severe sanctions if they fail to correctly comply with the requirements of legislation in terms of forfeiture. For example, section 1 of the Protection from Eviction Act 1977 provides that it is a criminal offence to unlawfully deprive the tenant of his right to occupy the premises. A person guilty of an offence under section 1 will be liable on summary conviction to a fine or on conviction on indictment to a fine and / or imprisonment.

The tenant may also have a claim for damages for losses arising out of the wrongful forfeiture.

Given the consequences of wrongful forfeiture, it is important that once the right has accrued the landlord does nothing that would waive the right to forfeit. The doctrine relating to waiver is complex but generally any act by a landlord which, after the right to forfeit has arisen acknowledges the continued existence of the lease, amounts to a waiver of the right to forfeit. Such acts may include accepting rent or demanding future rents / service charges.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.