Forfeiture: Should It Stay or Should It Go?
One of the most contentious issues in the relationship between freeholders and leaseholders is that of forfeiture. This is a freeholder right which can be used to terminate the lease in the event of a breach of a covenant (promise) committed by the leaseholder, after which the property reverts (returns) to the freeholder.
Forfeiture was commonly used for the most minor of leaseholder breaches but today the process is far more complicated. This is due to heavy regulation, particular the accounting provisions contained within s166 (requrement to notify long leaseholders that rent is due) through to s171 (power to prescribe additional or different requirements) of the Commonhold and Leasehold Reform Act 2002. These sections tighten up the rules governing when a freeholder can issue forfeiture proceedings.
1: STARTING POINT
There are three main steps within the process of exercising the right of forfeiture. The starting point is when the freeholder becomes aware of a breach (either explicitly or indirectly) and must determine as to whether it is a ‘continuing’ or a ‘once and for all’ breach
Examples of continuing breaches are:
- Unlawful sharing of occupation;
- Failure to keep premises in repair;
- Using premises in a prohibited manner such as for illegal/immoral use;
- Failure to keep premises insured.
Examples of ‘once and for all breaches where once the landlord waives the right to forfeit for that breach then it is waived for good:
- Rent arrears;
- Unauthorised sub-letting;
- Unauthorised assignment of the lease;
- Unauthorised alterations;
- Leaseholder insolvency.
If the breach gives the landlord the right of re-entry, then a choice is presented to elect between two sets of inconsistent rights under the doctrine of election which are to:
- Re-enter the property, recover possession and treat the lease as at an end (i.e. forfeit the lease) or;
- Continue to require compliance by the tenant with the terms of the lease.der.
If the choice to forfeiture is made it cannot be altered and great care has to be taken to avoid waiver which requires the freeholder to act as if the lease does not exist. It has three parts:
- The freeholder has knowledge of the breach (either explicitly or indirectly);
- The freeholder recognises that the lease remains in existence;
- The freeholder communicates the recognition of the lease to the leaseholder.
The following actions can be considered as committing waiver as they are consistent with the continuing existence of the lease:
- Demanding or accepting ground rent/service charge payments;
- Sending chasing letters;
- Applying for an injunction against a covenant breach or suing for damages;
- Arranging to inspect the premises (even though its in accordance with the terms of the lease);
- Serving statutory notices, again in accordance with the lease;
- Granting consents;
- Offering to accept or negotiate a lease surrender.
Carrying out any of the above where there is a ‘once and for all’ breach (a single rather then a recurring breach) means that even if the landlord has inadvertently acted as if the lease still exists, it is still deemed that he has made the irrevocable choice not to terminate the lease so the right to forfeiture has been waived and lost for good.
In continuing breaches, the repercussions of waiver are much less significant. For example, if a repairing covenant is breached then each day that the repair is not carried out means a fresh breach has been committed and the right of re-entry arises the following day.
Communication ‘Without Prejudice’
If communication with the leaseholder (or any representative) can’t be avoided then they should be conducted on a ‘without prejudice’ basis which in legal terms means ‘without detriment to any right or claim’. In laymans terms it means that whatever is said or done on this basis cannot later be used to any disadvantage, whether it is in a meeting, a letter, an e-mail etc). It also cannot later be used in evidence or relied upon by any party.
Great care is needed to ensure that communications remain of a ‘without prejudice’ nature unless an agreement is reached and the landlord is, at that stage, happy to give up their right to forfeit. If rent is accepted on that basis then again, the right to forfeit is waived.
More on the complicated area of waiver can be read here.
2: DETERMINATION OF THE BREACH AND SERVING NOTICE
It is s168 of the Commonhold and Leasehold Reform Act 2002 (no forfeiture notice before determination of breach) that provides that unless there is an admission of the breach by the leaseholder then a determination is required by anyone of the following:
- By a court;
- Under an arbitration agreement;
- By a tribunal.
Following that, s168(4) expressly gives jurisdiction to FTT for them determine that a breach of covenant or condition in the lease has occurred. The freeholder will need to be able to provide evidence to that effect which the Tribunal or the Court will test. It is easier to prove financial breaches but others, such as unlawful alterations or a breach of the tenants repairing covenant may require expert evidence such as from a surveyor. Nuisance claims require witness statements, diary logs from those affected, intervention by local authorities and/or police reports.
Should it be determined that the leaseholder is required to pay the outstanding amounts then prior to forfeiture, whether it is by a) peaceable re-entry which is the right of the freeholder to terminate a lease by taking physical possession of the premises or b) 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:
- Full details of the breach in queston (which today is usually by reference to the prior determination of the breach)
- 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 freeholder must allow a reasonable amount of time for the leaseholder to deal with the notice which must also be accompanied by:
- Details of the lease;
- The full names and addresses of both the Landlord and Leaseholder;
- Details of where the Leaseholder can serve any documents etc.
If the breach complained of relates to breach of a repairing covenant then the Leasehold Property (Repairs) Act 1938 may apply. For long leases this restricts the right to forfeit. Specific reference needs to be made in a S146 Notice to which this Act applies.
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.
When a Notice is Not Required
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 s146 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 in this situation 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’.
3: GRANTING RELIEF
The freeholder must allow a reasonable period of time (usually 3 months) for compliance and if the breach is remedied during that time then forfeiture is not applicable.
If the notice is not complied with then landlord may apply to the Court for an Order stating that the lease has been validly forfeited as a result of the breach and the service of the s146 Notice. Such an order is discretionary and court may order relief from forfeiture on terms appropriate to the individual case. This is where the court accepts that the lease has been forfeit but reinstates the upon certain specific terms such as payment of damages, costs and any other terms the court thinks fit.
Whilst the freeholder will usually seek an order that they are entitled to vacant possession, because the property is lawfully occupied as a dwelling, the premises cannot be re-entered without a court order so as not to breach s2 of the Protection from Eviction Act 1977 (restriction on re-entry without due process of law) which is applicable to both leaseholders and renting tenants.
LEASE have always felt that the rights of forfeiture were completely inappropriate to modern residential leasehold ownership and too open to abuse by the unscrupulous landlord (which I agree with). They also considered it questionable approaching the 21st century for the situation to remain whereby a landlord with perhaps no more than a 5% equity in the building could, by manipulation of the law, be in a position to deprive an owner-occupier of his home, leaving him not only homeless but with the continuing burden of still having to pay the mortgage (again something which I agree with).
I am also in agreement that if a property is forfeited as a result of a breach that costs £20,000 and the property is then sold for £180,000, the freeholder has an unfair advantage, and actually encourages them to escalate disputes, which may well be likely with the larger corporate freeholders as they can afford to.
However, whilst there are many calls for forfeiture to be abolished, I would like to see it overhauled. Why? Because I have a couple of leaseholders (a husband and wife acting as rental landlords) who continue to breach not only the service charge and ground rent covenants but have failed to pay the FTT determination made against them last year. They have altered their flats without applying for a license to alter and there have also been considerable repair issues which breach both the leases and the tenancy agreements.
I could quite happily see them lose their rentals without batting an eyelid!
We are now getting to the point where forfeiture is our only remaining option and it is the element of waiver which I feel needs to be addressed. Why embark on a legal process, when the decision is ignored, the breaches continue, the leasheholdger gets yet more time to ignore thing whilst we incur yet more legal costs in attempting to move the situation forward?
It remains my belief that some people actually deserve to lose their asset when they act as if no amount of legislation or legal action can touch them, especially when there would be no loss of home as these two leaseholders live in a £1m plus property elsewhere!.