Commercial Lease Forfeiture

While it is the goal of most landlords to attract and keep tenants who provide a regular source of income, occasionally it is necessary to end a lease prematurely. Landlords who find themselves with a tenant who falls into arrears on rent payments can forfeit the lease, allowing them to take back possession of the property. While this can be a useful and effective measure, it is not always the best course of action for either party and can have repercussions further down the road. Landlords should seek legal advice quickly to understand their options – as should tenants who find themselves unable to meet their rent obligations.

Generally speaking, tenants enjoy the security of tenure under the Landlord and Tenant Act 1954. This security is important to allow commercial tenants to run their business with confidence but relies on the prompt and regular payment of rent. If the tenant fails to do so, section 24(2) of the Act allows the landlord to forfeit the lease provided the agreement contains an express clause allowing for forfeiture and repossession. Landlords who wish to exercise this right should check not only that the clause exists but also the length of time the tenant must be in arrears before action can be taken. This can be anything from one day to a few weeks or months but is commonly 14 or 21 days.

When a tenant is in significant breach of their lease, a section 146 notice is served which details the breach and specifies a time for the tenant to remedy it. This is not usually required for failure to pay rent, although other steps need to be taken – such as making a formal demand for the lapsed rent. The landlord then takes possession either through peaceable re-entry of the property or through court proceedings. Property owners need to be careful not to do anything that waives their right to forfeit, such as accepting partial payment, which confirms the continuation of a landlord/tenant relationship even after the breach becomes apparent.

Once forfeiture has been set in motion, tenants (and undertenants) can apply for relief. This is a remedy awarded by the courts, which effectively reinstates the tenancy as though forfeiture had never taken place. The rules here are complex, with differing rights and timeframes depending upon the length of time the tenant has been in arrears, and whether possession was taken back through re-entry of the property or through the courts. This can cause considerable uncertainty for both parties, and the outcome is often reliant on the correct steps being taken before and during the forfeiture process.

A landlord faced with a defaulting tenant should carefully consider the outcome they are trying to achieve before taking action. Is it the aim to recover money owed, or to remove the tenant from the property altogether? Are they likely to find another tenant easily, and what are the prospects of relief being granted? As always, seeking legal advice from an experienced advisor at the outset is essential for both parties to ensure the most beneficial outcome for all concerned.

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