UK: UT Decision: A Landlord Can Waive Its Right To Forfeit A Lease, Even If The Right Is Not Yet Exercisable

The Upper Tribunal Lands Chamber (UT) confirms in Stemp v 6 Ladbroke Gardens Management Limited [2018] UKUT 375 (LC) that a landlord can waive its right to forfeit a residential lease even before it has completed the statutory process necessary to exercise that right.

This is a similar position to commercial leases, where the right to forfeit for irremediable breaches can be waived, even though a notice under section 146 Law of Property Act 1925 has not expired.

Like any good restaurant, there is a decent menu of options available for landlords seeking remedies for tenant breaches of a lease. Of these, forfeiture is a commonly used method.

In order to obtain a right of re-entry, there must first be a forfeiture clause in the lease. The formalities outlined in s146 of the Landlord and Property Act 1925 must then be followed before the right is exercisable. If the property is residential - as was the case here - s81 of the Housing Act 1996 must also be adhered to. The Housing Act requires a tribunal to decide whether the service charge payment is properly payable by the tenant.

Background

In Stemp, the tenants held a long lease of a residential property. The property was in serious disrepair. The landlord sought to carry out the repairs and recharge the cost to the tenants through the service charge. The lease provided that the service charge was payable in half yearly instalments.

The demand for the first instalment of service charge was made in April 2016. Under the lease, the right to forfeiture arose where there was non-payment after 21 days. The tenants did not pay. As a statutory requirement in residential leases, the landlord had to obtain a judgment from a tribunal that the service charge was payable before it could forfeit (s.81 Housing Act 1996). The landlord duly made this application with a view to proceeding to forfeiture.

In September 2016, the First Tier Tribunal (Property Chamber) (FTT) determined whether the first instalment of service charge was payable, the landlord issued a demand for the second instalment of service charge. Arguably this was an unequivocal act which, considered objectively, could only be regarded as being consistent with the lease continuing (and so amount to waiver).

In December 2016, the FTT determined that the first instalment of service charge was indeed payable. This gave the landlord the statutory green light to proceed to forfeit the lease for non-payment. Because the tenants paid shortly after judgment, this was not necessary. However, the landlord decided to claim its legal costs incurred in connection with forfeiture (recoverable as an administration charge under the lease).

The tenants argued that whilst the right to forfeit had arisen 21 days after service of the demand for the first instalment of service charge in April 2016, the landlord had then waived the right to forfeit by, amongst other things, demanding the second instalment of service charge in September 2016. Therefore legal fees in connection with forfeiture could only be recovered to this point. In contrast, the landlord argued that there could be no waiver of the right to forfeit whilst the right was not exercisable because of a statutory fetter. The right was not exercisable until the FTT decision in December 2016 (as required by s.81 Housing Act 1996), so any landlord action before that point was incapable of amounting to waiver.

Decision

The Upper Tribunal (UT) held that the landlord could waive its right to forfeiture, even during the period when there was a fetter upon exercising the right.

The UT noted that a right to forfeit would often be contested by the tenant and that it would not be unusual for the landlord to not know whether its right had crystallised until the various statutory formalities were completed. Therefore, the landlord could waive its right (or potential right) to forfeit the lease if it could be showed it had carried out an act so unequivocal that it could only be regarded as being consistent with the lease continuing (Greenwood Reversions Ltd v World Entertainment Foundation Ltd [2008] HLR 31).

On the facts, the demand for the second instalment of service charge in September 2016 amounted to waiver. It did not matter that the landlord was not able to exercise its right to forfeit until the FTT determination 3 months later, in December 2016.

Therefore, the landlord could only recover legal costs incidental to forfeiture up to waiver in September 2016.

Where does this leave us?

Stemp underscores the choice faced by landlords when faced with a tenant in breach of its obligations.

Generally, the test for waiver has not changed - objectively, the act must be so unequivocal that it could only be consistent with the lease continuing. A demand for rent will usually amount to waiver.

Residential leases

Landlords should be aware that the right to forfeit can be lost even though they cannot in practice exercise the right. Practical steps to avoid facing the problems in Stemp include:

  • Once facts are known upon which the right to forfeit arises (for example, an understanding that there has been non-payment of service charge demand), a landlord should be alive to the risk of waiver.
  • Fresh demands for payment under a lease will usually amount to waiver even when there is a statutory bar to forfeiture.
  • The test for waiver is objective and the landlord's subjective intention is not decisive.

Commercial leases

A different statutory regime applies to forfeit commercial leases and a determination under s.91 Housing Act 1996 is not required. However, Stemp's applicability is not limited to the Housing Act, but applies to any forfeiture situation where the contractual right to forfeit has not yet arisen.

For commercial landlords, this decision serves as a timely reminder that:

  • Where there has been a remediable breach - the right to forfeit will arise after the expiry of the notice given under s.146 Law of Property Act 1925. At that point it is possible to waive the right.
  • Where the breach is irremediable - the right to forfeit can be waived before the s.146 notice has been given and before it has expired.
  • Any property management or administrative letters sent to tenants when forfeiture is being considered should be sent on a without prejudice basis.

The service of s. 146 notices under commercial leases has also recently been discussed in Toms v Ruberry [2019] EWCA Civ 128 where it was held that a s. 146 notice could only be served once the right had arisen under the lease. This will be discussed in another upcoming Insight.

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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