Forfeiture (also known as re-entry) is an important but often complicated mechanism by which a landlord can recover possession of premises if the tenant has breached the obligations in their lease. This article focuses on forfeiture of premises that are wholly for commercial use.
The landlord’s right to forfeit is usually expressly reserved in the lease. Most forfeiture clauses will provide for the landlord’s right of re-entry to be exercisable on the occurrence of certain events, such as a breach of covenant, non-payment of rent or an insolvency event (which would typically include a tenant or guarantor being made bankrupt or a company falling into administration or liquidation).
We have previously published a "Five point guide" on forfeiture of commercial leases for non-payment of rent. This can be found here.
If the lease does not contain a forfeiture clause, or the landlord is looking to forfeit for a breach of a term other than non-payment of rent or on the occurrence of an insolvency event, landlords would be encouraged to seek advice at the earliest possible opportunity.
Advantages of forfeiting a lease
- Forfeiture can be a cost and time effective way of terminating a lease and re-gaining possession.
- Possession of the premises can be obtained without court involvement if the landlord is able to forfeit by peaceable re-entry.
- Forfeiture is a unilateral act by the landlord and does not require the landlord to negotiate with the tenant.
- Forfeiture can be a useful tool where a landlord wants to rid itself of a troublesome tenant before the expiry of a fixed term. This is beneficial where the lease does not include any early determination provisions.
- Forfeiture is a remedy available to landlords whether or not the tenant in question has the benefit of security of tenure under the Landlord and Tenant Act 1954.
Disadvantages of forfeiting a lease
- A landlord intending to forfeit a lease must be careful not to waive its right to do so by affirming the existence of the lease, for example by accepting or demanding rent outside of the grace period stated in the forfeiture clause found in the lease.
- If a landlord forfeits a lease when it has no right to do so, or after waiving its right to forfeit, a tenant could seek injunctive relief and/or consider making a claim for damages and loss against the landlord.
- A tenant whose lease has been forfeited by peaceable re-entry may apply for relief from forfeiture within the period of six months after the event and, if successful, the tenant’s lease will be reinstated.
- Forfeiting a lease will end all future liabilities under the lease, including those of any guarantors or former tenants.
- The landlord will become liable for utility costs and business rates from the date of forfeiture. Depending on the property and the market, this might not be an attractive proposition to a landlord.
Landlords should think very carefully before deciding whether to forfeit a lease and advice should always be obtained. We would also strongly recommend taking legal advice before re-letting premises to a new tenant within six months of forfeiting a lease of the same premises. Our real estate disputes and commercial real estate teams are well placed to advise both tenants and landlords on a wide variety of issues relating to forfeiture.
Readers should note that this article focuses on commercial premises only. If the premises in question are wholly residential or contain residential elements, readers are encouraged to seek legal advice at the earliest opportunity.
Tom O'Dell