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Tenants cannot ride roughshod over lease terms

Forfeiting a lease means an end to rental payments and a vacant property. It is not a decision lightly taken by a landlord but it may be the only solution for a tenant persistently in default. 

However a tenant may seek relief from forfeiture and the court has a wide discretion whether to grant it and to attach conditions. The court will consider all the circumstances of the case including the conduct of the parties. 

In the recent case of Freifeld v West Kensington Court Limited the Court of Appeal granted relief to a tenant who had shown a "cynical disregard" of its obligations.

Background

The tenant had a 99-year head lease of seven commercial retail units. A premium was paid on its grant, there was no passing rent and so the lease had a significant value.

The head landlord was also landlord of adjoining residential units. There had been a long running dispute over the use of one of the retail units as a Chinese restaurant. The tenant granted a future lease to the owners of the Chinese restaurant to come into effect at the end of the current term, without seeking the landlord's consent as the head lease required.

The landlord served notice to forfeit the head lease as soon as it discovered what had happened and the tenant sought relief. At first instance the judge refused relief. He found that the breach had been wilful and the tenant faced a tough challenge to persuade the court to grant relief. He considered that the value of the lease was dropping by the day as the likelihood of forfeiture increased. 

In a flurry of activity the tenant arranged for the future lease to be surrendered, appointed managing agents and offered to sell its interest. The judge remained unmoved and refused to grant relief.

Court of Appeal’s decision

The Court of Appeal disagreed with the judge's approach. Restating the law and commenting on the facts it held:

  • Relief from forfeiture will be granted even if a breach is deliberate – no special circumstances attach to a deliberate breach.
  • The relevant question is whether the damage sustained by the landlord as a result of the breach was proportionate to the advantage it would obtain if relief were not granted to the tenant.
  • The windfall to the landlord if the lease is forfeited is a question of proportionality. It must be considered on its own merits and only then weighed against the tenant's bad behaviour.
  • Relief from forfeiture would be granted on the condition that the lease would be marketed and sold, for which six months would be allowed. After that forfeiture would take effect. The landlord would have the right to refuse consent to the assignment; such consent not to be unreasonably withheld.

Comment

Landlords might feel frustrated that, even in the cases of deliberate breach, forfeiture is not automatic. The Court of Appeal is not unaware of this, commenting that its conclusion should not be misinterpreted as conferring "carte blanche" on tenants to disregard their covenants. In every case a balance must be struck. Even in cases where substantial value may be passed to the landlord, relief from forfeiture may be refused if there is no other way of securing remedy of the breach.

Nevertheless the landlord may be reasonably content in this case – the tenant out of the picture within six months, an assignee it has had the opportunity to vet and an order of the court that expenses and sums due to it are paid first from the proceeds of sale.

Contributor: Laura Ford

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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