Time to give up (possession)? Some recent cases on forfeiture in the commercial property context

17/10/2023

Forfeiture is, of course, a potentially important remedy for commercial landlords; and commercial tenants should be aware of its limitations. In this article, I look at a notable commercial forfeiture case from earlier this year, as well as a couple of interesting cases from over the last two years.

Agreement to accept forfeiture: Chug v Dhaliwal [2023] EWHC 804 (Ch)

In Chug v Dhaliwal, a third party occupied the demised property as a licensee of the tenant in breach of the non-alienation covenant in the lease; and, when the landlords realised this, they served a Section 146 notice on the tenant and re-entered the property, although they continued to accept rent payments in the meantime. The tenant agreed with the landlords to accept the forfeiture in return for not being pursued for dilapidations; and the third party negotiated with the landlords for a new lease, but, when those negotiations failed, the tenant brought a claim to challenge the lawfulness of the forfeiture or alternatively sought relief from forfeiture.

It was held on appeal that, whether the forfeiture had been lawful or not, the tenant was bound by his agreement with the landlords to accept it and relinquish any further interest in the demised property, including any relief from forfeiture. That point determined the appeal, but the appeal judge still dealt with the three grounds on which the appeal had been made – so the following comments were obiter dicta, and it may be that they should be treated with caution as it seems questionable whether at least some of them are reconcilable with other authority.

First, the judge said the breach of the non-alienation clause in issue was a continuing breach of the lease, on the basis that each day the tenant suffered the unlawful occupation by the third party afresh by choosing not to terminate his licence, so the landlords did not waive the right to forfeit the lease for that breach by continuing to accept rent after becoming aware of it. Second, the judge said a reasonable person in the position of the tenant would have understood the Section 146 notice, although not doing so in terms, to be asking him to regularise the irregular occupation of the property, so it did not fail to specify (as Section 146 requires) that the breach of the non-alienation clause had to be remedied. Third, the tenant having agreed to accept the forfeiture, the lower court could simply have said he had no right to seek relief from forfeiture; but the decision of the lower court to refuse such relief for that reason was in substance the same.

When a landlord waives forfeiture: Faiz v Burnley BC [2021] EWCA Civ 55; [2021] Ch 303

Here, the tenants notified the landlord of a breach of a covenant against sub-letting after the landlord had demanded insurance rent and it had fallen due; and the landlord then served a Section 146 notice based on the breach, sent a revised demand for the rent limited to the date it had been notified of the breach, and accepted payment from the tenants of the sum demanded. The landlord then purported to forfeit the lease, and the lower court held it had not waived its right to do so.

Lewison LJ held as a matter of principle that a landlord waives its right to forfeit a lease for a breach of covenant by demanding or accepting rent which fell due after the date of such breach when it is known to the landlord, but whether they acquired that knowledge before or after the rent fell due. Therefore, if the landlord knows of the breach at the time of demand or acceptance of the rent, the key issue is whether the rent had fallen due before or after the breach, with there being waiver if the rent fell due after the breach. As to what knowledge of the breach is required in this connection: where the breach of covenant was by sub-letting, the landlord would have to know both that the sub-letting had taken place and that the rent had fallen due after the date of such breach. Here, on the lower court’s findings, the tenants had failed to show that the breach took place before the rent fell due – and the landlord did not know of the breach when it initially demanded the rent, nor of the date of the breach at the time of the revised demand and acceptance – so there had been no waiver. Further, in the circumstances, the revised demand did not amount to a fresh demand for rent, just an indication by the landlord that it would accept only part of the sum fallen due at that point.

Interaction of arbitration and forfeiture: Chana v CC Properties [2021] EWHC 127 (Ch)

In this case, the tenant began arbitration pursuant to the terms of the lease to determine whether rent was suspended due to damage to the demised property, but meanwhile the landlord purported to forfeit the lease for non-payment of such rent. The tenant challenged the purported forfeiture, and, although at the time of the lower court hearing there was an appeal ongoing against the arbitration determination which had been made that rent was not suspended, the lower court judge went on to declare that the forfeiture had been lawful.

On appeal, it was essentially held that the judge had been wrong to make the declaration when he did, but that the decision on whether to overturn it should await the final outcome of the arbitration

proceedings. It was held that the tenant had invoked the arbitration clause in the lease to have the issue of the suspension of rent determined by arbitration, so it was not for the judge to determine that issue himself; and, as the issue had still been subject to the arbitration appeal, by declaring the forfeiture lawful, the judge had wrongly rendered that appeal pointless; so he should have determined other matters relevant to the forfeiture challenge, then adjourned the final decision until after the resolution of the arbitration appeal. Subsequent to the lower court hearing, the material parts of the arbitration appeal had been struck out, although the tenant had sought to appeal the strike out; and, as such, the final decision about the order to make on the appeal of the forfeiture decision was adjourned until the strike out appeal had been heard.

The material contained in this article is provided for general information purposes only. It does not constitute legal or other professional advice. No responsibility is assumed by any member of chambers for its accuracy or currency, and reliance should not be placed upon it. Specific, personal legal advice should be obtained in relation to any case or matter. Any views expressed are those of the editor or named author.