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 outstood for more than 3 years.
What Kind of Breach?
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 to assess 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.
It also cannot be commenced or a s146 Notice served unless there has been:
- A final determination of the issue by way of an application to the LVT;
- The tenant has admitted the breach;
- A court in any proceedings, or an arbitral tribunal in proceedings pursuant to a post-dispute arbitration agreement, has finally determined that the breach has occurred.
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) but not earlier than 14 days from the final determination.
More on serving a forfeiture notice can be read here.