The greatest power within the freeholder/leaseholder relationship is the ability of the freeholder to forfeit the lease (i.e. take away both the lease and the property) when leaseholders breach their lease terms. It is the Housing Act 1996 and s167 of the Commonhold and Leasehold Reform Act 2002 (failure to pay small amount for short period) that make it unlawful for freeholders to start proceedings for small debts, (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.
Before any attempt to apply forfeiture is made, the freeholder needs to establish what kind of breach has been committed because not all of them are capable of remedy.
Those breaches that are capable of remedy (and known as non-continual breaches) are:
- Breach of covenant against sharing possession;
- Breach of covenant not to make alterations or display signs;
- Breach of user covenant;
- Breach of covenant to repair or decorate (see below);
- Non-payment of service charges and ground rent for a particular period (which can be remedied by payment);
- Failure to allow access to the landlord or its agents on notice such as where the freeholder obtains the services of a qualified surveyor who will inspect the flat(s) in question with a view to assessing the extent of the breaches.
Breaches that can’t be remedied (and known as continual breaches) are:
- Illegal or immoral use of the property which will only be remedied when the tenant leaves;
- Breach of covenant against underletting;
- Breach of covenant against assigning.
After the freeholder has established the type of breach, the next step is probably the most difficult element of the act of forfeiture because it requires the existence of the lease not to be acknowledged in any way, shape or form.
There are 3 components to waiver which are:
- 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.
There is also the issue of potential acts of waiver (whether committed expressly or by conduct), which 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.
However if communication with the leaseholder (or any representative) cannot be avoided, it must be conducted on a ‘without prejudice’ basis. This includes the sending of service charge and ground rent demands and chasing letters for payment 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, not even on a ‘without prejudice’ basis.
Note: Waiver does not extend to unknown or future breaches but once non-continuing breaches have been waived, they cannot be relied upon as a ground for forfeiture in the future.
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.
Once it has been determined by the FTT that the leaseholder is required to pay the outstanding amounts then prior to forfeiture, (whether by peaceable re-entry which is the right of the freeholder to terminate a lease by taking physical possession of the premises or whether by court proceedings) the freeholder is required to serve a notice under s146 of the Law of Property Act 1925 (restrictions on and relief against forfeiture of leases and under-leases) specifying the following:
- The breach complained of;
- The requirement for it to be remedied (if capable);
- The amount of compensation to be paid under ss1 of s146 (c) of the Law of Property Act 1925 The words ‘by action or otherwise’ means that it extends to where the freeholder gains peaceable re-entry but void if the subsection is not complied with and the term ‘in any case’ relating to compensation to be payable by the leaseholder means that the freeholder does not need to ask for it if he doesn’t want it.
The Notice can only be served after 14 days from the final determination and must also be served on anyone else with an interest in the property. This is because forfeiture of a lease involves the destruction of all rights that feed off it, so sub-lessees, mortgagees, assignees and occupiers all stand to lose their interests in the premises.
Service Charges Reserved as Rent
However, where the lease reserves the service charge as rent and provides that it is recoverable as rent, there is no need to serve a section 146 notice as a precursor to forfeiture proceedings in the event of non-payment. Such service charges nevertheless fall within the statutory definition of “service charges” under s18(1) of the Landlord and Tenant Act 1985 and are therefore subject to statutory protection. Consequently, forfeiture of the lease for a non payment of service charges reserved as rent is subject to restrictions on forfeiture that are imposed by s81 of the Housing Act 1996. These largely mirror the requirements of s168 of the 2002 Act. This same section also contains provisions allowing recovery of the landlords costs, specifically ‘a lessor shall be entitled to recover as a debt due to him from a lessee, and in addition to damages (if any), all reasonable costs and expenses properly incurred by the lessor in the employment of a solicitor and surveyor or valuer, or otherwise, in reference to any breach giving rise to a right of re-entry or forfeiture which, at the request of the lessee, is waived by the lessor, or from which the lessee is relieved, under the provisions of this Act’.
The freeholder must allow a reasonable period of time (usually 3 months) for compliance and if the breach is remedied then forfeiture is not applicable. If the breach is not remedied within a reasonable time the court has the discretion to grant relief to allow yet more time for remedy, provided the leaseholder has applied for it. Even if it is granted then the freeholder can continue to go ahead with enforcing forfeiture at any time before possession has actually been taken.
Affected parties can also apply for relief against forfeiture and the Court has a broad power to grant it. Typically, a sub-tenant will have to make good his landlord’s defaults and to enter into a new lease with the head landlord that contains the same duties as his landlord owed: this can often involve taking on new rent and repairing duties if the sub-tenant wishes to remain in the premises.
Having said that, the freeholder will usually seek an order that they are entitled to vacant possession of the property because where the property is lawfully occupied as a dwelling, the premises cannot be re-entered without a court order under the Protection from Eviction Act 1977, applicable to both owner-occupiers and subtenants.
If the tenant either fails to remedy the breach (if remediable) or compensate the landlord within a reasonable period of time then with regards to occupied residential property, the freeholder must enter under court proceedings in order not to breach s2 of the Protection from Eviction Act 1977 (restriction on re-entry without due process of law).