The greatest power within the freeholder/leaseholder relationship is still 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. Such breaches will be financial (i.e. service charge arrears) or those of disrepair. It is not an easy decision for small freeholders to reach (i.e resident management companies who own the freehold rather than the big commercial freeholders) not to mention the fact that not all breaches 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.
This is an area in which the freeholder must be very careful not to commit. 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.
In most cases, when the decision to forfeit the lease is taken, the freeholder must serve a notice under s146 of the Law of Property Act 1925 (restrictions on and relief against forfeiture of leases and under-leases) prior to forfeiture whether by peaceable re-entry or court proceedings. This notice must:
- Specify the breach complained of;
- Require the tenant to remedy the breach, (if capable of remedy);
- Require the freeholder to be financially compensated if they require it under subsection 1 of s146 (c) of the Law of Property Act 1925 (restriction on and relief against forfeiture of lease and under-leases). 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 by the FTT 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, such as sub tenants (renting tenants) and mortgage lenders.
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 proceed 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 by court proceedings in order not to breach s2 of the Protection from Eviction Act 1977 (restriction on re-entry without due process of law).
If a freeholder intends 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 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;
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.