The end of forfeiture?

The end of forfeiture?

This article was published on: 25th May 2021

It is 15 years since the Law Commission last proposed radical reform of the laws governing the termination of tenancies, including the abolition of common law forfeiture, yet those reforms are yet to become law[1].  However, these reforms may, following the catalyst of the Coronavirus pandemic, be about to become a reality.

The Government recently launched a consultation entitled “Commercial Rents and Covid-19: Call for Evidence” in an effort to formulate an exit strategy for the current restrictions on forfeiture and other enforcement options, including CRAR and insolvency measures.  A number of interested parties, including members of the Property Litigation Association (PLA), of which several of our lawyers are members, were approached for their views.

 

Current restrictions relating to commercial tenancies are due to expire on 30 June 2021.  The national commercial rent debt is estimated to exceed £3bn.  It is clear that if the restrictions end suddenly in June, under current laws, there could be a tsunami of peaceable re-entry evictions with limited options for tenants who cannot afford to secure relief from forfeiture.

The Government recognised that a carefully managed exit strategy is necessary to preserve tenant’s businesses and the millions of jobs that they support.  However, many landlords feel restrictions have been too severe for too long, and are open for abuse by tenants, many of whom are using the opportunity to restructure their businesses and enter into CVAs.

The Consultation confirms that unless productive discussions are taking place between landlord and tenants, the government will “not hesitate to intervene further” and legislate.  From the very specific questions posed by the government, it is not difficult to see what new procedures are being contemplated, and these are remarkably similar to those proposed by the Law Commission 15 years ago.  In fact, they are presented, in our view, as a fait accompli.

 

The 2006 Proposals

The original paper (Law Com 303), which is likely to be the starting point in the latest round of consultations, proposed that forfeiture be replaced with two forms of statutory termination procedure – the standard procedure and the summary procedure. The two would apply in different circumstances.

Standard Termination Procedure

Under the standard procedure, a termination claim may be made following a tenant default that is not rectified upon service of a default notice on the tenant and all derivative interest holders. The court will grant a termination order if it is proved that the tenant failed to comply with the terms of the default notice.

A landlord cannot bring a claim under the standard procedure unless the tenant has breached a covenant or condition, and a notice has been served which specifies the default, how it must be remedied, the date by which the remedial action must be completed and any consequences of non-compliance.

The Court must have regard to the conduct of the parties, the reasonableness of any deadlines imposed, any attempts that the tenant has made to remedy the breaches and what the tenant can still do to comply, before making an order.

Under the proposed procedure, the Court may either:

  1. grant a termination order, which will bring the lease to an end;
  2. grant a remedial order, specifying what the tenant needs to do to remedy their breach(es) and by when; or
  3. make an order for sale of the leasehold interest and appropriate division of the sale proceeds. This would be relevant in instances where termination would bring an unjustified windfall gain to the landlord.

 

Summary Termination Procedure

The summary procedure is an accelerated process designed to replace peaceable re-entry. Following a tenant default, a landlord may serve a summary termination notice on the tenant and holders of derivative interests, bringing the tenancy to an end one month from the date of service, unless the tenant or derivative interest holder applies to the court to discharge the notice.

The landlord cannot use the summary procedure in certain circumstances.  These include where the tenancy has more than 25 years left to run, or where the tenant is a breach of a repairing covenant and the lease was originally granted for a term exceeding 7 years with more than 3 years left to run. This preserves the protection afforded to certain tenants under the Leasehold Property (Repairs) Act 1938.

If the application is refused, the tenancy will determine on the date that the application is refused. Applications may be refused where a landlord can prove that the tenant would, in standard termination proceedings, have no realistic prospect of persuading the court not to make a termination order.

If the application is successful, the tenancy will continue, and the landlord will have to start again with the standard procedure by serving a tenant default notice.

Relief from the summary procedure may be obtained when the tenant or derivative interest holder applies to the court for a “post termination order”. This must be done within 6 months of summary termination, and the Court would have jurisdiction to make “any order in connection with the tenancy that the court thinks appropriate and proportionate”.  This could lead to uncertainty for landlords.

 

The End of Forfeiture?

What was proposed in 2006 and is being considered once more is no less than a complete overhaul of the current law.  It would see the abolition of peaceful re-entry and forfeiture, instead creating statutory termination procedures. It would apply to all business and residential tenancies regardless of whether they were entered into before or after the scheme was introduced, and whether or not they contain a right of re-entry.

There would be benefits to both landlords and tenants within these proposals. One crucial benefit for landlords would be the end of the dreaded common law principle of waiver of the right to forfeit, as the proposed legislation would not prevent a landlord from, for example, accepting rent once a default notice has been served.

For tenants, their rights and interests would be better protected by statute alone than under the current law, which should mean the end of unexpected 5am lock changes. The inclusion of holders of derivative interests would also mean that mortgagees and undertenants would have the right to apply for other orders, potentially compromising the rights currently enjoyed by a landlord under the existing law, although these parties are currently entitled to apply for relief from forfeiture

Given that the current restrictions protecting business tenants are due to end on 30 June, we can expect the government to move quickly on this, or at least to extend restrictions until new laws can be passed.  Otherwise, there are going to be 1000s more boarded up commercial units by the end of July, and the high street may struggle to fully recover.

[1] Law Com No 303 – Termination of Tenancies for Tenant Default

Author: Matt Pugh, Partner

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