Understanding forfeiture of a commercial lease

Forfeiture of a commercial lease can be a complex process for both commercial landlords and tenants. It is important to understand what forfeiture means, whether it can be used, the options available such as relief from forfeiture, as well as the potential consequences of wrongful forfeiture.

Forfeiture of a commercial lease : the basics

In this article, we explain the basics of forfeiture of a commercial lease aimed at those new to commercial property.

What does forfeiture mean?

Forfeiture is the legal process by which a landlord terminates a lease due to breach of the terms and conditions in a lease agreement. The breach could be failure to pay rent on time, subletting without permission, or any other breach of a term in the lease. Subject to certain statutory restrictions once the right to forfeit arises the landlord has the right to change the locks, re-enter the property and take possession.

How to forfeit a commercial lease

The circumstances in which the right to forfeit arises will vary between leases depending on the specific clauses that deal with forfeiture and the terms of the tenant’s covenants. It is important that the terms set out in the lease on how and when the right to forfeit arises are followed carefully or otherwise the landlord may fall foul and possibly be in breach of covenant.

In most leases, there will be a grace period (typically 14 or 21 days) provided in the lease agreement before forfeiture can take place following a breach of covenant or condition. During this period, the tenant has the opportunity to rectify the breach and avoid the right to forfeit arising.

Seeking to forfeit a lease for any reason other than due to unpaid rent, would require a landlord to serve upon the tenant a notice pursuant to s.146 Law of Property Act 1925. Within this notice the landlord must set out the breach being complained of; if the breach is capable of remedy requiring it to be remedied within a reasonable time and whether any compensation in money for the breach is due. Normally the lease would require the tenant to pay the landlord’s costs in preparing and serving the notice.

Upon the notice expiring and the tenant failing to remedy the breach, the landlord would have the option to either peacefully re-enter the property or apply to the court to make an order for possession in favour of the landlord. The landlord will be treated as having elected to terminate the lease upon service of court proceedings on the tenant, however it will only terminate upon the court making a judgment for possession. During the period between service of the proceedings on the tenant and the court making a final possession order it is often known as a “twilight period”. Here the landlord should demand “mesne profits” (otherwise known as damages for unlawful occupation) only and not rent..

If the landlord chose to peacefully re-enter the property, they must physically re-enter the property which is usually done by changing the locks or putting a chain across the door as well as affixing a forfeiture notice at the main entrance. The landlord cannot use excessive force – a criminal offence will be committed if violence is used to gain entry and someone is physically at the property and opposes entry.

Court proceedings should always be used if the commercial premises are mixed with residential use (a flat above a shop for example).

Relief from forfeiture

Tenants facing forfeiture may seek relief from forfeiture through applying to court for relief. If the landlord is seeking forfeiture by way of court proceedings the tenant would request such relief when serving their defence. This allows tenants to present their case and potentially avoid forfeiture occurring or have their lease reinstated if it has already occurred, provided they can demonstrate that they are willing and able to remedy the breach that led to forfeiture or otherwise satisfy the court to grant relief on such terms as the court thinks appropriate to do justice. Advice should be sought on the time limit by which relief should be sought as this varies depending on the circumstances but the general rule is that if you want to seek relief you should do so promptly.

Once forfeiture has occurred the lease cannot be reinstated without an order of the court, even if both landlord and tenant agree that they want the forfeiture to be regarded as cancelled. In that circumstance the court should be invited to make an order for relief by consent resulting in the reinstatement of the lease.

Burdens of wrongful forfeiture

Wrongful forfeiture can have significant consequences for both landlords and tenants. A landlord may face legal challenges if they wrongfully purport to forfeit a commercial lease without following proper procedures or providing adequate notice. Tenants may lose their business premises abruptly, leading to financial loss and disruption of operations resulting in substantial damages being claimed from a landlord. Advice should therefore be obtained before taking steps to forfeit a lease to ensure the right exists and the right has not been waived – see below.

Waiving the right to forfeit

It is essential for both landlords and tenants to be aware of waiving rights related to forfeiting a lease. Landlords should ensure they do not inadvertently waive their right to forfeit by treating the lease as continuing. What actions amount to waiver is a very difficult area. For example, accepting rent payments after knowledge of the breach(es) is a waiver but accepting insurance payments might not be depending on how the lease is written. If you are intending to forfeit then it is best not to interact with the tenant in anyway without first obtaining legal advice as to what you may and may not do without waiving your rights.

Tenants should also be cautious about actions that could be interpreted as waiving their right to relief from forfeiture.

Final thoughts

Understanding forfeiture of a commercial lease is crucial for both landlords and tenants in navigating potential disputes or breaches in lease agreements. By being aware of what forfeiture entails, options available such as relief from forfeiture, and avoiding pitfalls like wrongful forfeiture, both parties can protect their interests and maintain positive landlord-tenant relationships. It is advisable for commercial landlords and tenants to seek legal advice when dealing with issues related to forfeiting a commercial lease to ensure compliance with relevant laws and regulations.

If you have any queries on forfeiture of a commercial lease or indeed any other landlord and tenant question,  please do contact a member of the Property Litigation team.

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As such, our blogs and posts are not intended to advise you on the law and must not be relied upon as legal advice. If you require advice on a particular issue then please contact us and we will be pleased to help.