Forfeiture Clauses – what are they and how do they work?

Forfeiture Clauses – what are they and how do they work?

A forfeiture clause is a common clause in a commercial property lease and allows the Landlord to terminate the lease prematurely where the tenant is in breach of their obligations.

The terms of a commercial lease can be breached in many ways, such as a Tenant’s failure to pay rent; a change of use without permission; failing to repair the Property in accordance with the Lease; allowing a third party to occupy and many more.

In most cases the breaches can be remedied quite easily, and the Landlord may allow the Tenant time to remedy the breach without taking further action, waiving his right to forfeit by allowing the breach to continue, or acting in a way that allows the breach to continue.

However, some breaches would give the Landlord real cause for concern about the Tenant’s ability to fulfil their obligations under the Lease for the full contractual term, and so most commercial leases will contain a forfeiture clause which will allow the Landlord to forfeit the lease if the tenant breaks certain conditions.

The most common reason for terminating a lease prematurely is non-payment of rent, the tenant has been made bankrupt, goes into liquidation or there is an insolvency arrangement such as administration or bankruptcy, or the Tenant has breached any other term of the Lease. Most modern leases should include a forfeiture clause setting out specifically that these are the reasons for forfeiture.

Procedure

If a right to forfeit arises, depending on the reason for the forfeiture, a Landlord must follow a statutory notice procedure before terminating the lease. In most cases a s.146(1) notice must be served upon the tenant which allows them time to rectify the breach, by setting out in the notice what the breach is, and if there is a possible remedy for that breach including a request to do so. However, the exception to this is non-payment of rent. Failure to remedy this breach by the tenant within a reasonable amount of time or a set time stated in the Lease, the Landlord is then within their right to exercise its rights to forfeit.

Landlords Waiver

When a right to forfeit has been made clear, it is imperative that the Landlord does not do anything that could waive that right. Waivers may occur if the Landlord knows of the tenant’s breach, does something that suggests that the lease continues to exist (for example, accepts or demands rent) and communicates that to the tenant.

Types of Forfeiture

There are two approaches open to commercial Landlords when a right to forfeit arises – peaceable re-entry or Court proceedings. 

Peaceable entry

This is where (subject to statutory limitations on the Landlord’s right to forfeit) the Landlord physically re-enters the property and changes the locks themselves (or by a third party such as bailiffs) or prevents the tenant entering and attaching notices of forfeiture.

Court proceedings

Forfeiture by court proceedings is where the Landlord issues proceedings for the forfeiture of the lease and the lease terminates upon the proceedings being served. However, the forfeiture will not be deemed effective for some time – during the period of the proceedings being served and the court confirming whether the forfeiture was effective, the Landlord is considered to have ended the lease and during this period cannot seek to enforce or rely on the Tenant’s covenants within the Lease.

Relief from Forfeiture

Upon the Landlord forfeiting the lease, a tenant (or a third party with an interest in the lease such as mortgagee) can apply for relief of forfeiture from the Court. The Court’s approach to granting relief depends on the type of breach and, the seriousness of the breach, the conduct of each party, whether the breach can be easily remedied and that is balanced against any loss suffered by the Landlord as against the potential loss by the Tenant if the relief was not granted. The lease will be reinstated if the Tenants application for relief is granted.  

Effect of Forfeiture

Once it has been ascertained that forfeiture has been “effected”, neither the Landlord nor the Tenant has any continuing liabilities under the lease but they do remain liable for any breaches that occurred prior to the forfeiture. The tenancy will immediately end and the Landlord is entitled to possession.


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