UK: When Will A Tenant Be Granted Relief From Forfeiture For A Deliberate Breach?

Last Updated: 16 May 2016
Article by Sona Ondhia

Introduction

The ability to forfeit a lease is one of the most draconian but necessary remedies available to a landlord. In an ideal world breaches will be remedied and the relationship mended, but often that is not the case with forfeiture being the only realistic available option. This can often lead to what on the face of it appears to be unfair outcomes with a landlord getting a windfall through increases in the value of the freehold reversion. This loss by tenants is more devastatingly felt where leases are protected by virtue of the Landlord and Tenant Act 1954 or when dealing with long leases.

The Courts seek to balance the relationship via their wide discretion for granting relief from forfeiture which was established as far back to the case of Hyman v Rose [1912] AC 623, where at 631 Lord Loreburn described the Court's role as follows:

"...The Court is to consider all the circumstances and the conduct of the parties. Now it seems to me that when the Act is so express to provide a wide discretion, meaning, no doubt, to prevent one man from forfeiting what in fair dealing belongs to someone else, by taking advantage of a breach from which he is not commensurately and irreparably damaged, it is not advisable to lay down any rigid rules for guiding that discretion."

Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806

On 30th July 2015, judgment was handed down in this much awaited case. This case deals with whether relief from forfeiture should be granted to tenants who have deliberately breached their covenants, when there has been some mending of their ways and particularly because forfeiture would create a windfall for the landlord.

Background

The appellants, Mr and Mrs Freifield were long leaseholders of seven units. The tenants sublet one of the units to a "controversially-run Chinese restaurant ("the Chinese restaurant")". The alleged practices of the restaurant left a lot to be desired including "poor waste management, smoking breaks and preparation of food in a courtyard area behind the Chinese restaurant (which was not in possession of the respondent) and noisy air conditioning units".

The lease contained the following provisions:

  1. Not to assign part only of the demised premises
  2. Not to underlet the whole or any part of the demised premises without the consent of the Landlord (such consent not to be unreasonably withheld)"

Despite the same, Mr and Mrs Freifield granted a future sub-lease of one of the units without the head landlord's consent and were therefore in breach of the above provisions.

The landlord served a notice under section 146 of the Law of Property Act 1925 ('Section 146 Notice'). A Section 146 Notice will provide a tenant a reasonable period of time to remedy any breaches, failing which the landlord will be in a position to forfeit the lease.

Mr and Mrs Freifield failed to comply with the Section 146 Notice and the landlord subsequently sought to forfeit the lease by way of a counterclaim in other proceedings.

Relief from Forfeiture

In March 2013 Mrs and Mrs Freifield sought relief from forfeiture on such terms and conditions as the Court thought fit,

The Judge held that the granting of the future sub-lease was a deliberate breach of the alienation provisions in the lease, as it was established under cross-examination that Mr Freifield was aware of his obligation to seek consent for the same.

The Judge also found that Mr and Mrs Freifield had failed to properly manage other obligations under the lease.

The Judge was faced with a balancing exercise; the Landlord stood to receive a windfall considering the value of the leasehold interest, yet the Judge considered that this could not be determinative otherwise it would mean that "breaches could be committed by tenants with valuable leases with impunity". The Judge considered that the value of the leasehold interest should have given Mr and Mrs Freifield more reason to perform their obligations under the lease adequately and that failure to do so raised cause for concern as to the future relationship particularly where the breach is deliberate. The Judge considered that tenant had a heavy burden to obtain relief from forfeiture. He concluded by ruling that "the Freifelds face a vertiginous, but not necessarily impossible, climb up to the peak of relief from forfeiture".

Relief was therefore not granted.

Further Application

At around the same time that judgment was being handed down, Mr and Mrs Freifield attempted to avoid the loss of their lease by, at the eleventh hour, surrendering the future sub-lease that was the cause of the breach

An application was made by Mr and Mrs Freifield for relief on the basis that the breach had been remedied; they sought six months to sell their lease, failing which the Landlord would receive a windfall of between £1 million and £2 million.

It was conceded in broad terms that the value of the lease was between £1–2 million but that the Judge took the view that the property only had a hope value which diminished every month closer to trial. This application was refused.

Appeal

At the appeal stage further evidence was introduced as to the appointment of professional managing agents.

The Court of Appeal ruled that pursuant to the authority of Southern Depot Co Ltd v British Railways Board [1990] 2 EGLR 39 relief can be granted even though the breach was deliberate. Further it was determined that special circumstances do not need to exist. The wilfulness of the breach is a relevant consideration but to state that relief should only be granted in exceptional cases would curtail the Court's discretion. Reliance was placed on the case of Magnic Ltd v Mahmood Ul-Hassan [2015] EWCA Civ 224 in particular:

"[50] The starting point for the exercise of our discretion has to be to remind ourselves that the purpose of the reservation of a right of re-entry in the event of unpaid rent or a breach of covenant is to provide the landlord with some security for the performance of the tenant's covenants. The risk of forfeiture is not intended to operate as an additional penalty for breach. It is an ultimate sanction designed to protect the landlord's reversion from continuing breaches of covenant which remain unremedied and to secure performance of the covenants: see Shiloh Spinners Ltd v Harding [1973] AC 691 at p 723, [1973] 1 All ER 90, [1973] 2 WLR 28. There may, of course, be breaches which are so serious and irremediable as to justify the refusal of relief: for example, an unlawful sub-letting. But in most cases relief will be granted on the breach being remedied and on terms as to costs."

Crucially the Court of Appeal found that the Judge had not applied the test of proportionality as a self-standing consideration to be determined on its own merits. The Judge erred in taking the view that there was no injustice in refusing the application and wrong in his assessment of the value of the lease. Mr and Mrs Freifield were therefore granted relief from forfeiture for six months so that the head lease could be sold.

Briggs LJ stated that tenants are not to assume from this case that they can disregard their covenants, and will be granted relief from forfeiture. "In every case a balance will have to be struck, and there may well be cases where even substantial value has to be passed to the landlord, if no other way of securing the performance of the tenants' covenants can be found."

Comment

The case demonstrates the difficult balancing exercise the Courts face when deciding whether to exercise their discretion and grant relief from forfeiture. Proportionality plays an ever increasing role particularly when the tenant's breach is wilful and the landlord stands to make a windfall. Such cases provide the perfect recipe for costly litigation particularly when the parties lose sight of the fact that forfeiture is intended as an ultimate sanction to secure performance of it covenants. A detailed understanding of the Court's role and putting into place the scheme which ultimately prevailed at the outset rather than at the end of the litigation would likely have resolved the matter sooner and more cost effectively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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