The greatest power of the freeholder when leaseholders breach the terms of their lease (whether the breach is financial or that of disrepair) is that of forfeiture, the taking back of the lease (and the property) from the leaseholder before its natural end. Governments have introduced considerable measures to protect leaseholders from being faced with both the threat and the real action of forfeiture because it used to be carried out arbitrarily for the most minor of lease breaches.
It is the Housing Act 1996 and especially the Commonhold and Leasehold Reform Act 2002 that make it unlawful for freeholders to start proceedings for small debts, with specific legislation under s167 of the 2002 Act preventing the freeholder from forfeiting leases for service charge arrears (including ground rent and administration charges) where a) the outstanding amount is £350 or less and b) no part of it has been outstanding for more than 3 years.
Forfeiture is also not possible in any of the following situations:
- Against a Rent Act protected tenant;
- Against an Assured tenant and an Assured Shorthold tenant under the Housing Act 1988;
- Against a long leaseholder of a house who is claiming to enfranchise under the Leasehold Reform Act 1967
- RMC’s set up via Right to Manage or through tri-party leases because these companies do not own the freehold.
TYPE OF BREACH
Before approaching the freeholder can approach the First Tier Tribunal it has to be established as to what kind of breach has been committed
Examples of ‘continuing’ breaches are:
- Non-payment of ground rent or service charges
- Breaches of user restriction;
- Breach of a prohibition against sharing of occupation;
- Prolonged immoral use (irremediable);
- Bankruptcy of an person or insolvency of a limited company, (except if this were later nullified by the court (irremediable);
With the committing of the above breaches, the leaseholder may still be able to get relief of waiver if he applies for it. For example, the non-payment of ground rent or service charges could be remedied by payment.
On the other hand, breaches that have been held to be non-continuing (one-off) include:-
- Unauthorised alterations;
- Unauthorised sub-letting (irremediable);
- Unauthorised assignment (irremediable);
- Non-payment of service charges and ground rent for a particular period;
- Failure to allow access to the landlord or its agents on notice.
Once non-continuing breaches have been waived, they can never again be relied upon as a ground for forfeiture.
The distinction between the two types of breach is extremely important because of the act of waiver which has three components:
- The freeholder has knowledge of the breach;
- The freeholder recognises that the lease remains in existence;
- The freeholder communicates the recognition of the lease to the leaseholder.
Potential Acts of Waiver
Whether committed expressly or by conduct, potential acts of waiver include:
- The granting of consents;
- The serving of statutory notices;
- An injunction sought against a covenant breach;
- Arrangements made to inspect the premises;
- Offering to accept or negotiate a surrender of the lease;
- Continuing to send service charge and ground rent demands.
If however there is no way to avoid communication with the leaseholder or any representative only then should it be conducted on a ‘without prejudice’ basis. This not only includes the sending of service charge and ground rent demands but also the sending of chasing letters that are required to be carefully worded in order not to incur waiver. There should also be no discussions of future payments with either party, even on that same basis.
Note: Waiver does not extend to unknown or future breaches and waiver on one occasion does not operate as a general waiver for continuing breaches in the future.
The other kind of lease breach concerns that of disrepair. Waiver cannot be committed as long as the disrepair continues as the right to forfeiture will be continually recurring on a daily basis and making it ‘un-waived’ because of its continuation.
If a freeholder does intend to forfeit in respect of disrepair, whether by peaceable re-entry (the exercise of a landlord’s right to terminate a lease by taking physical possession of the premises) or civil claim (and where the term of lease was originally granted for 7 years or more and has at least 3 years left to run), the Leasehold Property (Repairs) Act 1938 applies. Therefore the forfeiture notice must make reference to the right of the leaseholder to serve a counter notice within 28 days and providing the leaseholder the opportunity of claiming the protection of the Act which is stated in the landlord’s s146 notice.
Once the leaseholder has claimed this protection, (which he can do by letter) the freeholder has to make a preliminary claim for the court’s permission before taking any further action. The 5 alternative grounds on which the court can, in its discretion, give permission are:
- That immediate remedy of the disrepair is necessary in order to protect the value of the landlord’s reversion (and so evidence from a valuer will be needed);
- That immediate remedy is needed in order to comply with a legal requirement, such as a repairs notice issued by the local authority;
- Where the tenant is not in occupation of the whole or part of the premises, that remedying the disrepair is required in the interests of the occupant;
- The cost of immediate repairs is much lower than cost of delayed remedy;
- Other special circumstances that would make it just and equitable to give permission.
Jervis v Harris Clause
A common device for avoiding those restrictions from the 1938 Act is to include a ‘Jervis v. Harris clause’ in a lease. This allows the landlord to enter premises and spend their own money on the necessary repairs and then claim that sum from the tenant as a debt. This can however still be difficult to enforce if access is refused because it then becomes necessary to sue for an injunction, which is a discretionary remedy. It can also be expensive to enforce and uncertain in that the tenant may dispute the need for particular repairs or defaults in payment.
On the other hand, a ‘one-off breach’ such as structural alterations will be waived upon the acceptance of rent or any other positive action that acknowledges the existence of the lease.
LEASEHOLD LIFE’S EXPERIENCE
Legislation has made the act of forfeiture much harder but this was because the freeholder got the return of an asset that far outweighed any breach the leaseholder may have made and it totally ignored the reasons why.
This still hasn’t prevented forfeiture being used by the big players to the serious detriment of leaseholders and which have led to continued calls for it to be abolished.
However in my personal opinion we should be extending our horizons to look at how we deal with those leaseholders who sublet and fall into the category of so-called ‘rogue landlords’. I work across both the leasehold and the PRS sector as 18 our of the 22 flats on my block are sublet. As a result I am looking to specifically target the use of forfeiture toward a) those leaseholders who deliberately fail to pay service charges (well and truly outside those reasons defined by legislation and for years on end) and b) where ‘rogue landlords’ place risks to their tenants, surrounding residents and that of the building. There is also the issue of anti social behaviour, not only committed by tenants but also their visitors.
Whilst I accept that the amount of arrears on my block may pale into insignificance against those of other leaseholders who have been at the mercy of large corporate landlords, (which we are not) I am unconcerned about the potential loss of both the lease and therefore the property to any lessee/landlord who flouts legislation. I have one such individual in particular who has not only flouted every legal requirement in the book regarding service charges and disrepair issue but has culminating in his failure to even apply for a landlord license. Having been advised of the steps involved in the process, he could remain in illegal operation for many more months without one!
He has tried to sell the property more times than I care to remember but since we secured a charging order on the property he has not pursued this avenue. He even went so far as to start the statutory lease extension process but failed to defend his position on the arrears at the FTT so now our solicitors can add their fees to the list!
And when a landlord commits assault because he doesn’t like having legislation quoted to him as a result of us knowing exactly what we are doing, then would I like him to lose his asset? You bet I would!
It is the law that allows such situations to happen and therefore it is the law that must be properly written. If forfeiture is totally removed then leaseholders will be no better off when they find their block deteriorating because the freeholder has had its teeth well and truly extracted!
I agree with those who say that if a lease breach is judged in open court (as opposed to a closed court which has been known to happen) than a reasonable amount of time must be given to repair any breach. However, (and again based on my own experience) why give further chances to remedy through waiver when it can be used as yet another delaying tactic?
So not only must forfeiture be kept but the circumstances under which waiver is deployed should also be re-constructed.