An overview of relief from forfeiture
9th August 2019
9th August 2019
Forfeiture is a means for a Landlord to terminate a lease, in the event of some default by the Leaseholder. The right must be conferred expressly: there must be a ‘forfeiture clause’ or a ‘proviso for re-entry’ (see here our December 2018 Legal Update “Forfeiture is real and the Court will grant it”).
This Legal Update outlines the remedy of ‘relief’ from forfeiture, which can be granted by the Courts to Leaseholders or other interested parties to restore the lease as though the forfeiture had never taken place. Any interests (such as subleases or the rights of mortgagees) will also be reinstated, which can affect the Landlord’s future plans or dealings with the property.
Whether and when relief will be granted depends on a number of factors and the process for claiming relief against forfeiture varies depending on the nature of the breach. An application can be made either as a defence within the Landlord’s proceedings or as a standalone application if a possession order has already been made.
Relief from forfeiture for breaches other than rent arrears
If a Landlord forfeits a lease for a breach other than non-payment of rent (such as non-payment of service charges or unlawfully subletting), section 146 of the Law of Property Act 1925 (LPA 1925) applies. Under LPA 1925, s 146(2) a Leaseholder can apply for relief at any time before the Landlord has taken possession of the property through Court proceedings (as is normally the case).
Relief is discretionary meaning that the Court will take into account all the circumstances and the conduct of the parties in deciding whether or not relief should be granted. Where the Court considers it fit to do so, relief may be granted on such terms, if any, as to payment of the Landlord’s costs, expenses, damages, compensation, penalty, or otherwise, including the granting of an injunction to restrain any like breach in the future.
Unlike in the case of non-payment of rent (see below), it is only in certain exceptional circumstances (such as where the order for possession is set aside or reversed on appeal) that relief can be given after the Landlord has re-entered under a possession order.
Relief from forfeiture when breach is for rent arrears
Where the ground of forfeiture is non-payment of rent and the Landlord’s action is in the County Court, section 138 of the County Courts Act 1984 (CCA 1984) applies.
Under s 138(s), the Leaseholder will obtain relief automatically without the need for an application if, not less than five clear days before the hearing, it pays into Court the arrears due plus the Landlord’s costs of the action.
If the Leaseholder fails to make that payment and the Court is satisfied that the Landlord was entitled to forfeit the lease, a possession order will be made and the Leaseholder gets a further opportunity to be granted automatic relief at that stage under s 138(3). The Landlord will be entitled to possession after the expiry of a period which the Court thinks fit, being not less than four weeks, unless the Leaseholder pays into Court all the arrears plus the Landlord’s costs during that period. The period can be negotiated and extended at any time before the Landlord takes possession under s 138(4).
Unlike the position under s 146 LPA, under s 138(9A), the Leaseholder can apply for relief after the Landlord has recovered possession of the property following the making of a possession order. That application must be made within six months of the date on which the Landlord recovers possession. Relief is discretionary so the Court will take into account all the circumstances and, if it thinks fit to do so, grant relief subject to such terms and conditions, as it thinks fit.
Can the Landlord re-let or sell the property immediately?
Where the Landlord has recovered possession for non-payment of rent, we are often asked whether they can re-let or sell the property immediately to realise that asset and discharge the sums owed to it by the Leaseholder.
There is no simple answer to this question. As the grant of relief is discretionary, the Landlord cannot prejudge whether or not the Leaseholder would subsequently be granted relief, which will cause serious complications if the property is re-let or sold in the interim. It would always be our advice, therefore, to err on the side of caution and wait the six month period from the date of possession, before the Landlord decides what to do with the property.
It is unusual for the Court to refuse to grant relief where the Leaseholder pays the arrears and costs due, although the Court has the power to limit the arrears to be paid by the Leaseholder for relief to be granted to only those arrears for which the Landlord has a right of forfeiture, which may not be all of the arrears if they include a number of older demands.
It is important to note, however, that the above is merely an overview of what can be a very technical process and legal advice should always be taken on the correct process to be followed in any given case. This Update does not include the rights of third parties such as sub-tenants and mortgagees to apply for relief in their own right.
You may also find our June 2018 Legal Update “When leaseholders are in breach - some Do’s and Don’ts”, and our Legal Update from January 2019 “The deeper perils of waiver!”, in which we gave more information on forfeiture and waiver.
For more information, please contact Susan Fox, Senior Litigation Executive, on 01435 897297 or firstname.lastname@example.org.
This legal update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.
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