Forfeiture of a Commercial Lease

Are you looking for advice about forfeiture of a commercial lease?

If so this article is for you.

Forfeiture allows a landlord to bring a commercial lease to an end and to take back possession of the property.

In certain circumstances this can be done by simply re-entering the property and changing the locks.

It’s a very powerful remedy for landlords where their tenant has breached its lease.

How I Can Help

I act for landlords who want to forfeit a commercial lease to get their property back so that they can re-let it to a better tenant as soon as possible.

I also act for tenants whose lease has been forfeited to advise them on whether the landlord has carried out the process lawfully, or to apply to court for relief from forfeiture to have their lease reinstated as if it had never been forfeited.

Below I’ve set out everything you need to know about forfeiture of commercial leases.

There Must Be A Breach To Forfeit A Commercial Lease

The right to forfeit a commercial lease will only arise if the tenant has breached the terms of its lease.

A landlord who tries to forfeit a commercial lease where there has been no breach could find itself in hot water and subject to a claim for damages for unlawful eviction.

Typically that will also involve an application by the tenant for an injunction to be put back into occupation immediately and for the landlord to pay its legal costs.

There Are Two Types Of Breach

When it comes to forfeiture of commercial leases there are really only two types of breach:

1. Non-payment of rent; and
2. All other breaches

The reason that we separate the tenant’s failure to pay the rent from all other breaches of the lease, is that non-payment of rent allows the landlord to forfeit the lease by “peaceable re-entry” (changing the locks) without warning, whereas if a landlord wants to forfeit a lease for any other breach it first needs to serve notice on the tenant.

We’ll look at these two methods of forfeiture further below.

There Must Be A Right To Forfeit

The right to forfeit a commercial lease must be set out in writing in the lease.

It is generally accepted that if the lease does not include a right to forfeit then the landlord cannot bring the lease to an end via forfeiture.

Most modern leases include a right to forfeit as standard and they will set out clearly the circumstances in which the landlord can enforce that right.

The Right To Forfeit Must Have Arisen

It is all well and good having a forfeiture clause in a lease, but careful consideration needs to be given to the wording of the clause to be sure that the right has actually arisen.

For example, it’s very common for modern leases to say that the right to forfeit for non-payment of rent will kick in 7, 14 or even 21 days after the rent has fallen due.

The period in between the rent falling due and the right to forfeit arising is called the “grace period” as the tenant is allowed a short period of grace to clear the arrears before forfeiture can take place.

A landlord who tries to change the locks on its tenant during the grace period will be acting unlawfully and could find itself in trouble.

The Right To Forfeit Must Not Have Been “Waived”

A landlord can lose the right to forfeit a commercial lease by “waiving” it.

Waiver occurs when, after expiry of the grace period, the landlord, being aware of the tenant’s breach, does something to acknowledge the ongoing existence of the lease.

This could be an act such as sending demands for future rent or service charge for example.

I would advise landlords who want to forfeit not to have any communication at all with a tenant after expiry of the grace, and not to demand or accept any sums from them.

I also advise tenants where the right to forfeit a commercial lease has been waived.

The Forfeiture Process

As I touched on above there are two methods of forfeiting a commercial lease.

1. Peaceable Re-Entry (Changing the Locks)

If a tenant has failed to pay its rent and a landlord wants to take back possession of the premises it can do so by “peaceably re-entering” the property at a time that it is empty and changing the locks.

This often takes place very early in the morning when no-one is around.

It is quite common to employ certified bailiffs or specialist enforcement agents to carry this process out with a lock smith.

It will also involve the preparation and service of notices to inform the tenant of what has happened (and to ensure that it doesn’t try to break back in).

It should also involve the preparation and service of notices to deal with the tenants goods and belongings that will inevitably be left behind. I’ll discuss this a little later.

Note – if you are a landlord and your tenant hasn’t paid the rent there are other options available to you.  For more information take a look at my article on Commercial Tenants Not Paying Rent.Commercial Tenant Not Paying Rent? You Have 10 Options

2. Serving Notice And Court Proceedings

For breaches of a lease other than non-payment of rent, a landlord will first need to serve notice on the tenant setting out details of the breach and requiring that breach to be remedied within a reasonable time.

What is a reasonable period of time will depend upon what type of breach it is. Some breaches are incapable of being remedied, but notice must still be served in relation to them before forfeiture can take place.

The notice must be given in a specific form pursuant to section 146 of the Law of Property Act 1925.

If notice of the breach has been served and the tenant has failed to remedy it the landlord then has the option of either peaceably re-entering the property, or applying to court for an order that the lease be forfeited and possession be given.

Changing the Locks v Applying To Court

Deciding which of the two options to take for breaches other than non-payment of rent will depend upon the circumstances of each case.

Changing the locks is cheaper and quicker, but if the landlord gets anything wrong with that process, or if a reasonable period of time hasn’t passed, it could find itself in trouble with the court.

There will be times when the locks cannot be changed (for example the premises may be occupied) or where such action is not appropriate (for example where the breach or the steps required to remedy it are disputed).

If that is the case the landlord should make a short application to court.

Tenants Applying for Relief From Forfeiture

A tenant will be entitled to go back into occupation of the property, and have the lease reinstated as if it had never been forfeited, if it makes a successful application to court for “relief” from forfeiture.

Such an application will only succeed if a tenant remedies the breach in question and pays all of the landlords related costs.

So a tenant whose lease has been forfeited for non-payment of rent will only be granted relief if it clears all of the arrears and pays the landlord’s legal fees and any bailiff’s fees, leaving the landlord in the same position it would have been in had the tenant paid its rent in the first place.

There is no firm rule on how long a tenant has to make an application for relief from forfeiture, but it is generally accepted that a tenant is expected to do so within six months of forfeiture.

Dealing With The Tenant’s Belongings

On taking back possession of the premises the landlord will almost always find a certain amount of goods or possessions belonging to the tenant.
It will owe a limited duty of care in relation to these and will want to put pressure on the tenant to remove them.

In these circumstances we use a “Torts” notice to give the tenant a short period of time to collect the goods and threaten to dispose of them if they are not collected within that period.

At the point of re-entry a landlord or its agents should take a full inventory of the goods that it finds in the

premises to ensure that there are no disputes further down the line regarding what was left behind.

Forfeiture Case Studies

I’ve recently acted on both sides of the forfeiture process.

Case Study 1 – Acting For A Commercial Landlord

I was recently instructed by a landlord who wanted to carry out forfeiture of a commercial lease because its tenant had continually failed to pay the rent, despite promising to bring the account up to date on numerous occasions.

My client relied upon the rental income and could not allow matters to continue indefinitely.

I looked at the situation and advised the landlord that it had probably waived the right to forfeit for the time being by its recent actions, but that the right would arise again very soon.

I therefore told the client not to have any further exchanges with the tenant, who had already been sent a rent demand for the future rent.

As expected, the tenant failed to pay the rent on the due date.

The right to forfeit the lease arose 14 days later.

We instructed enforcement agents to attend the property at 6am the next morning to change the locks. This forfeited the lease giving control of the property back to my client.

We served notice on the former tenant immediately and after a few exchanges they agreed to come and collect their belongings and move on.

My client has now managed to re-let the premises to a new tenant who is paying regularly and on time.

Case Study 2 – Acting For A Commercial Tenant

My team and I were recently instructed by the tenant of retail premises.

It had been negotiating terms for a new lease with its landlord and the relationship seemed fine.

Due to an oversight it failed to pay the rent on one occasion.

Rather than pick up the phone the landlord opted to forfeit the lease on the first available date by changing the locks.

It was an aggressive move, but lawful.

The client had the funds to pay the rent arrears and so we contacted the landlord’s solicitors to explain the situation and that we were confident that an application for relief from forfeiture would succeed.

We managed to agree a tenancy at will for our client to go straight back into occupation and sent an application off to court soon afterwards which was agreed with the other side to reinstate the lease without the need for a court hearing or the related costs of that.

The client only lost two days of trading and has put in place better internal processes to ensure that the same mistake doesn’t happen again.

Forfeiture of Commercial Leases

I hope that this article has given you an idea of what is involved in the forfeiture of commercial leases and the things that you need to be aware of if this is something that you are considering or have been affected by.

If you are thinking about forfeiting a commercial lease, or if your landlord has changed the locks on you, feel free to get in touch. I’d be happy to discuss this with you.

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