Commercial leases are beneficial to both the landlord and tenant in many different ways. However, leases also contain an element of risk which both landlords and tenants need to be aware of and take steps to protect themselves against.
In addition to the break option clauses we discussed in a recent blog, one way landlords often protect their investments is through the inclusion of forfeiture clauses. In this blog we will take a brief look at what forfeiture is and what relief tenants may be able to receive should the landlord exercise their right of forfeiture.
What is forfeiture?
The Right of Forfeiture provides a landlord a method of terminating a lease and thereby taking back possession of the property in the event that the tenant is in breach of the lease. Examples of breaches which may result in a landlord choosing to exercise their right of forfeiture include things such as the tenant not paying rent on time or not keeping the property in a state of good repair.
The decision to exercise their right of forfeiture is not one that landlords will take lightly. After all, having a vacant commercial property is likely to result in a loss of income until a new tenant can be found.
While break options are available to both the landlord and the tenant, the right of forfeiture is only available to the landlord and it is only once the right to forfeiture has been exercised that the tenant can apply for relief against it.
How the right to forfeit is exercised
There are two ways a landlord can exercise their right of forfeiture. The first is called peaceable re-entry, which involves the landlord taking back possession of the property by physically re-entering it. Normally, landlords will change the locks in these instances, to stop the tenant from gaining further access to the commercial property.
Peaceable re-entry is often used when a tenant has failed to pay the rent, thereby breaching the rental agreement. If the landlord accepts payment of the outstanding rents they may end up waiving their right to forfeiture by mistake, so it is always a good idea to check with solicitor before taking this course of action.
The second way a landlord can exercise their right of forfeiture is through Court proceedings. While Court proceedings can often take longer and cost more, they carry with them less risk for the landlord as getting peaceable re-entry wrong could cause additional complications, for instance if the commercial property includes any form of residence, such as a flat above a shop.
How a landlord exercises their right of forfeiture by issuing Court proceedings will depend on the breach to the lease agreement. If the forfeiture is for non-payment of rent, most commercial agreements will contain clauses specifying the time period of non-payment that can elapse before a landlord is afforded the right to forfeit.
If the tenant has breached the commercial lease in some other way, for example by subletting the property, then the landlord must serve the tenant with a Notice under section 146 of the Law of Property Act. The Section 146 Notice must state the nature of the tenant’s breach. It must also include a reasonable timeframe for the tenant to remedy the breach, if that is possible to do.
Should the breach be linked to changes made to the property without the landlord’s agreement, or the tenant not keeping the premises in a state of good repair, utilising the services of a Building Surveyor can provide valuable insights into what may be involved in getting the property back to its original state or ensuring any necessary repairs are accounted for.
What is relief from forfeiture?
Relief from forfeiture is available to commercial tenants in certain circumstances and within strict time limits. Normally, if the tenant acts swiftly and takes the necessary steps to remedy the breaches to the lease they are being accused of, a Court is likely to grant them relief from forfeiture. In cases where relief is awarded the lease is effectively reinstated as if the right of forfeiture was never exercised.
The method the landlord relied on to exercise their right to forfeit will determine the tenant’s response and ability to apply for relief. A tenant’s right to apply for relief comes into effect as soon as the landlord exercise their right to forfeit.
Because the circumstances that may result in a landlord deciding to exercise their right of forfeiture can be so varied, we highly recommend that both landlords and tenants speak to a legal professional before taking action to ensure the correct steps are taken at the right time for the claim for either forfeiture or relief to be successful.
How AWH can help
If the right of forfeiture has been exercised because a commercial property has not been kept in a good state of repair or structural changes have been made without the permission of the landlord, we are here to help.
Our team of Chartered Surveyors has decades of experience providing reports outlining what would be involved in any required remedial work. This can help both landlords and tenants understand cost and timescales involved, and can support both clams of forfeiture and relief.
Speak to our team of Surveyors on 0800 071 5517 or email firstname.lastname@example.org to find out how we can help.