All too frequently, a Tenant breaches its obligations under the Lease and Landlords approach us seeking advice on what remedies are available to them and how to action such remedies. This article will provide a brief overview of some of the remedies available to Landlords when Tenants default on their obligations in the Lease.
Forfeiture is a Landlord’s remedy for breach of a Tenant’s covenant, which involves ending the Lease before its expiry date and removing the Tenant from the premises. Forfeiture can be done way of peaceable re-entry (save that this is not available against a residential tenant in lawful occupation) or by court order. Forfeiture is available for every breach of covenant including failure to pay rent. Given the nature of forfeiture as a remedy, it will only be useful to a Landlord, however, if they are able to re-let the Property.
In the event that forfeiture is an appropriate remedy to the Landlord, three pre-requisites must be met before pursuing such action. Firstly, there must be an express forfeiture provision in the lease, which enables the Landlord to re-enter the premises and prematurely end the lease on breach by the Tenant of any of its covenants, or upon the occurrence of certain specified events. Secondly, the re-entry clause needs to be triggered; in other words, the form of breach needs to give rise to the right of the Landlord to forfeit the lease. For example, if the lease provides that the Landlord can forfeit the lease in the event of arrears of rent for 14 days after becoming payable, then the right of entry only opens up once this grace period has expired. Finally, the Landlord must not have waived their right to forfeiture, by way of their conduct after knowledge of the breach. Such waiver by the Landlord would occur if the Landlord treats the lease as ongoing by way of accepting or demanding rent for example.
The procedural steps for forfeiture depend on the type of covenant, which has been breached by the Tenant and the Landlord wishes to rely upon. If the Landlord wishes to forfeit the Lease because the Tenant has breached its covenant to pay rent, then no section 146 notice is required to be served on the Tenant. However, for any other breach, a section146 notice must be served before the Landlord can forfeit the Lease. The section 146 notice must set out the breach, require it to be remedied within a reasonable time if capably of remedy and if required, demand compensation for the breach. Further, if the lease in question was originally granted for at least 7 years and there are at least three years left to run, then a particular type of section 146 notice is to be given and a particular procedure to be followed. In such a case, the particular section 146 notice must set out the right of the tenant to serve a counter-notice in the landlord within 28 days which will require the Landlord to get leave of the court before proceeding with forfeiture.
One can make an application to the court for relief from forfeiture. In relation to rent arrears, there are two jurisdictions dealing with this being the County Court and the High Court. The County Court will only consider relief no later than 6 months from recovery of possession by the Landlord. The High Court, on the other hand, will consider what is reasonable, having regard to all the circumstances and the above statutory limit for the County Court. For other breaches, the court, in considering the application for relief from forfeiture, will have regard to the conduct of the Tenant, the nature and gravity of the breach, the impact on the value of the Property and any remediation.
2. Equitable Remedies
As an alternative to forfeiture, the Landlord could pursue equitable remedies. Equitable remedies include applying to the court to make an order for specific performance to enforce compliance with the covenants under the lease and applying to the court to order an injunction to prevent or undo the Tenant’s breach. The latter remedy is commonly used when there has been a breach of a user or alteration clause. It is important to note that these remedies are at the discretion of the court and will not be ordered if damages are adequate.
3. Self-help Clause
Self-help is an available remedy in response to a Tenant in breach of its repairing covenant. It involves the Landlord entering the premises, making good the damage and recovering the cost from the Tenant as a debt. Importantly, this is only available on the condition that the lease expressly reserves the right on the Landlord to do so. Care should be exercised if a Landlord does so, as they must ensure that they do not breach their covenant to the Tenant of quiet enjoyment of the Property. Therefore, if it is a commercial lease and the Tenant is in breach of its repair covenant, the Landlord must work around the conduct of the Tenant’s business if it seeks to make good the damage itself.
4. Pursuing Third Parties
A further alternative remedy is to pursue the guarantor, if any, for all breaches which can be reduced to monetary payments. There are three types of guarantor that a Landlord could possibly pursue: (1) The Tenant’s Guarantor; (2) Former Tenants under an Authorised Guarantee Agreement (‘AGA’) and former Guarantors who have provided a sub-guarantee guaranteeing the assignor’s performance of its AGA (‘GAGA’); and (3) For leases that commenced before 01 January 1996 former tenants and guarantors under privity of contract. Importantly, the guarantor shall not be liable to pay any amount unless a section 17 notice has been served within six months of the sum becoming due.
5. Rent Arrears
The below are additional remedies relevant only in relation to rent arrears.
- In the event of non-payment of rent and there being a rent deposit deed, you may draw down against the deed for sums of monies due to you under the Lease. There should be an obligation on the Tenant in the Rent Deposit Deed to pay up the rent back up to the Rent Deposit Deed once drawn down.
- Self-help remedy of Commercial Rent Arrears Recovery (‘CRAR’) which allows Landlords to seize goods to the value of the sum owed. This remedy only applies to principal rent and VAT, not to other things that are usually reserved as rent such as insurance premium. To use CRAR, the premises must be purely commercial, the Tenant must be in arrears for a minimum of 7 days and you must give the Tenant a minimum of 7 days’ notice before seizing goods.
- Serve a statutory demand. The minimum amount for a statutory demand debt must be at least £750 in the case of a corporate Tenant and be at least £3,000 in the case of an individual Tenant. Non-payment of the statutory demand within 21 days means act of bankruptcy and the Landlord can then take nest step and wind up the company. This remedy is useful when the Tenant has some level of solvency and is not going bust as it attracts the attention of the Tenant.
- Where the Tenant is in rent arrears for a minimum of 7 days and there is also a sublease, a Head Landlord could serve a prescribed notice on the sub-tenant requiring their next payment of rent to be made to the Head Landlord. The notice must be served no less than 14 clear days before date of payment under the sublease.
Author Brandon Silver joined the firm in August 2018, and he is currently sitting in the property department. He achieved a high 2:1 in his Law Degree from Durham University in June 2018 and he will be undertaking the Legal Practice Course from September at BPP University in Holborn
During his time at Durham he was the Director of the Access to Justice Project, a Pro Bono project undertaking to help prisoners who have claimed their innocence but have exhausted all their legal options
Brandon has already had a broad experience of working in a law firm having completed vacation schemes at Memery Crystal, K&L Gates LLP and Penningtons Manches Solicitors LLP
Furthermore, he reached the national finals of the KPMG International Case Competition 2017 which tested his ability to develop real-world and innovative business solutions to clients’ issues and was also nominated as one of the Bright Network Top 100 Future Lawyers in 2016