Relief from Forfeiture: a chance for redemption, but no guarantees
In recent months we have seen a marked increase in the number of commercial leases which have been forfeited by Landlords. Whilst most commercial Landlords are aware that they have the ability to forfeit a lease and that once that right has been exercised the lease is brought to a premature end, some commercial Landlords do not realise that a tenant can apply for relief from forfeiture which if successful, reinstates the lease to the extent that it is as if the lease had never been forfeit.
The statutory right to claim relief from forfeiture is contained in section 146 (2) Law of Property Act 1925 which provides that the Court may grant or refuse relief as it thinks fit, having regard to the conduct of the parties and to all the other circumstances. The very wide discretion enjoyed by the Court when faced with an application for relief, which means that it is difficult to predict with any certainty whether an application for relief from forfeiture will succeed.
Generally, relief will be granted if:-
- the tenant remedies the breach relied upon by the Landlord or, if compensation is an adequate remedy, compensation is paid in respect of a breach which cannot be remedied; and
- the Court is satisfied that the Tenant will perform its obligations in future
The Court has over the years been at pains to avoid setting down a rigid set of rules governing relief from forfeiture. Whilst a tenant's conduct throughout the term of the lease and the nature and seriousness of the breach are factors which will influence the Court's decision, no one factor, including the fact that the forfeiture of the lease arose from a deliberate breach on the part of the tenant, will be determinative of an application for relief, as highlighted by the Court of Appeal's decision in the case of Freifeld v West Kensington Court Limited earlier his year.
Freifeld v West Kensington Court Limited (2015) - the background
The dispute centred on a Head Lease of seven commercial retail units which formed part of a block of residential flats at West Kensington Court, London. The Head Lease, which was granted in 1982 for a term of 99 years, was acquired at a premium. Whilst no rent was payable under the Head Lease, as the rent achievable in respect of the subletting of the Units was estimated to be in the region of £133,000, the Head Lease had considerable value.
In December 2011, the Tenant sub-let one of the commercial units without the Head Landlord's consent in breach of a term of the Head Lease. The Landlord served a section 146 notice and, after the Landlord took steps to forfeit, the tenant applied for relief from forfeiture on such terms and conditions as the Court saw fit. That application was dismissed, the judge declaring that the tenant had demonstrated "a cynical disregard for their own obligations under their lease".
Prior to and during the days the Court was giving its judgment, the Tenant made a further application for relief from forfeiture, this time on the basis that relief be given on condition that the Tenant be given six months within which to complete the sale and assignment of the Head Lease, failing which it would be surrendered. The Tenant submitted that as a result of the Court's decision not to grant relief, the Landlord had gained a windfall of £1 million to £2 million which it said was disproportionate to the loss that was actually suffered by the Landlord arising from the Tenant's breach.
By this time, the Tenant had secured a surrender of the unlawful sublease. Nonetheless, that application was dismissed too, the judge being of the opinion that the Head Lease had been of little/no value from the time that it had been forfeit by the service of the proceedings. The Tenant appealed to the Court of Appeal.
Court of Appeal
In a unanimous judgement, the Court of Appeal granted relief from forfeiture, albeit on the basis that if contracts for the sale of the Head Lease were not exchanged within 6 months, the earlier Order dismissing the application for relief from forfeiture would take effect.
The Court of Appeal held that whether it was appropriate to allow the Landlord to receive a windfall as a result of forfeiture was a matter of proportionality, to be considered on its own merits and weighed against the Tenant's conduct. The Court of Appeal disagreed that the Head Lease had no value once proceedings had been served (which acted as a forfeiture of the lease) as the Court could grant relief, which was what it was being asked to do.
Whilst the circumstances of the breach, and in particular the wilfulness of the breach, are matters to be taken in account when considering whether relief should be granted, the proportionality of the loss to the Tenant when compared with the breach, the damage, if any, suffered by the Landlord and any windfall that would be received by the Landlord must be considered.
In the final paragraph of the Court of Appeal's judgment, Briggs LJ made clear that the Judgment should not be misinterpreted as conferring carte blanche on Tenants to disregard their leasehold obligations. Each application for relief will need to be considered on its own facts; Landlords should not assume that the forfeiture of a lease is the end of the matter, just as Tenants should not assume that relief from forfeiture will be granted.
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.