When a tenant breaches a covenant in a lease, most leases give the landlord a right to forfeit the lease (i.e., to terminate the lease and regain possession of the property). The kind of covenant breaches giving a right to forfeit are likely to be wide and can include unauthorised subletting, damage to the property, or illegal activities in the property. The most common breach giving the landlord a right to forfeit though, is for non- payment of rent – the subject of this article.
If the tenant breach relates to anything other than non-payment of rent, then before any action can be taken to forfeit the lease, the landlord must serve notice under Section 146 of the Law of Property Act 1925 and give the tenant a reasonable period to remedy the breach. If the tenant fails to remedy the breach within a reasonable time, the landlord is entitled to forfeit the lease.
When the tenant is in breach of the rent payment covenant the forfeiture process is slightly different. Ordinarily, the lease provides an initial period from when rent falls due for payment, during which the landlord cannot forfeit (typically 14 or 21 days). After that period has expired the landlord can, subject to what follows, exercise its right to forfeit by peaceable re-entry if the tenant is in arrears. Forfeiting by peaceable re-entry typically means that the landlord engages a bailiff to change the locks early in the morning when there is no-one in the premises and then puts up a notice explaining that the lease has been forfeited. The landlord is not required to serve notice on the tenant of such intended action and it can be a very effective way of making a tenant with rent arrears pay up in full quickly (which must be done if the tenant wishes to obtain relief from such forfeiture and get back in the property) or whatever else the landlord wishes to do with the premises. If the landlord does not wish to forfeit by peaceable re-entry, it can apply to court for a possession order based on the forfeiture of the lease.
The potential pitfalls of accepting rent after forfeiture
One important factor for a landlord considering forfeiture to think about is whether it has done anything to waive its right to forfeit. The most common way this can happen is by accepting and/or demanding rent in respect of a rent period that begins after the right to forfeit relied on by the landlord has arisen (i.e., when the tenant breach of covenant relied on took place). Such acceptance or demand is, in law, deemed to mean that the landlord has elected to treat the lease as subsisting and so it may not, thereafter, forfeit the lease for that breach. Landlords need to be alive to this waiver issue when accepting or demanding rent after the right to forfeit arises.
The 2021 Court of Appeal decision in Faiz and Others v Burnley Borough Council brought some clarity for landlords facing this dilemma. Lewison LJ considered that demanding or accepting rent which accrued and was due prior to the breach will not amount to waiver, even if the landlord had knowledge of the breach when it demanded payment. However, if the landlord has knowledge of the breach and with such knowledge accepts rent which fell due after the date of the breach, even if the landlord did not know of the breach on the date when the rent in question fell due, this will amount to a waiver. In this case, the landlord had re-issued a rent invoice after it had knowledge of a tenant covenant breach. However, the revised invoice only demanded payment of rent prior to the date it became aware of the breach. This was held not to amount to a waiver because it was a revised invoice rather than a new one and it did not relate to a period following the date on which rent fell due after the landlord was aware of the breach.
The following conduct would also amount to a waiver by the landlord if the payment(s) are not quickly returned to the payor:
- accepting rent from a third party on behalf of the tenant;
- rent being accepted by the landlord’s agent – even when it was not instructed to accept it; or
- accepting rent ‘without prejudice’ to the landlord’s right to forfeit.
Warding off waivers when a tenant presents payment
To avoid these situations, it is sensible to place a complete rent stop on the account as soon as a decision to forfeit is made. Any rent that the tenant (or a third-party on behalf of the tenant) does pay can then be treated on a case-by- case basis. Unless the tenant expressly states to the contrary when making payment, any rent received can be allocated by the landlord to the oldest arrears which would prevent there being a waiver of the right to forfeit if the due date for payment of such arrears pre-dates the landlord’s knowledge of the tenant breach. Careful consideration should be given to rent that is paid with remittance advice specifying allocation to rent which has fallen due after the date of breach – if this is accepted by the landlord and the due date for payment of that rent period post-dates the knowledge of the tenant breach, this will waive the landlord’s right to forfeit. If a landlord receives payment in respect of rent that it is worried would, if accepted, result in waiving the right to forfeit, then providing the landlord pays such monies back to the tenant within a brief period (no more than seven days), this should avoid the risk of it having waived the right to forfeit.
Waiver of forfeiture can be a tricky area to navigate, and landlords should be cautious if considering the option of forfeiture.