At our Housing Law Conference in November I presented a session for landlords about forfeiting residential leases. It is a rarely used but nonetheless very useful remedy, but it is very important to understand the risk of waiving the right. A recent case has demonstrated this point well.
Where a tenant breaches a tenancy, a landlord has a right to seek possession to end the tenancy. The equivalent right for a landlord of a long lease is forfeiture. It is an old remedy, and the law relating to it (unlike the law relating to tenancy possession proceedings) has grown over centuries, via a number of cases and statutes. It is a right which many are therefore slightly uncomfortable with (although that does not need to be the case).
In a residential context, a landlord must issue proceedings at court to forfeit the lease. Before he does so, the leaseholder must either admit the breach or there must be a court or tribunal determination that the leaseholder is indeed in breach. For all breaches other than payment of rent, the landlord must then serve a Section 146 notice. Where the breach is a debt, it must be for at least £350 (or have been owed for more than three years) before the landlord can forfeit.
Where the breach is non-payment of service charges, all seems straightforward so far – once the leaseholder is in breach (if the debt is sufficient), the landlord must issue proceedings at the tribunal or court for a judgment, then once that judgment or determination is decided, the landlord can proceed to forfeit.
The risk of waiver
But – and this is where things can get tricky – the landlord has to be careful not to waive his or her right to forfeit in the meantime. Waiver happens when a landlord knows he or she is entitled to forfeit, and does something which unequivocally treats the lease as continuing. What does this mean in practice where a landlord has to carry on managing and running a building, complying with its obligations to other leaseholders whilst waiting months – possibly even years – before being in receipt of the determination.
This was the question posed for the Upper Tribunal in the case of Stemp and Stemp v 6 Ladbroke Gardens Management Ltd.
A service charge demand for £18,971.72 was served on Stemp (tenants) on 1 April 2016. The right to forfeit arose on 22 April, when it had been unpaid for 21 days. On 29 April, Ladbroke Gardens Management (landlord) issued proceedings at the tribunal for a determination and made it clear in the paperwork that it was seeking a determination in contemplation of forfeiting the lease.
The case was heard on 16 December, at which point the tribunal held that the full sum was due.
However, between 22 April (when the right arose) and 16 December the landlord had taken a number of steps in order to properly manage the building.
Had taking these steps waived the right?
The landlord had addressed letters to “the leaseholders” – the tribunal said this did not waive the right; at that point, they were the leaseholders. It was not an unequivocal act treating the lease as continuing.
The landlord had written to the tenants about certain steps which they both needed to take to comply with the advice of fire assessors. This included reference to contributions to be made for fire extinguishers, the need for the flat doors to be upgraded (that being a lessee responsibility), and certain works to be done to the communal areas which would be charged via the service charge. The tribunal held that performing these responsibilities, which the landlord had both by virtue of the lease and the requirements of the fire authority (to which criminal liability attached) were not acts so unequivocal that they were only consistent with the lease continuing. It was not acceptable for the landlord to have postponed dealing with these matters given their importance. Where the landlord had proclaimed that it was proceeding towards forfeiture for an identified breach and in the meantime performed its responsibilities regarding the building it did not waive the right.
A similar logic was applied to a consultation which the landlord had carried out in relation to major planned works. Where the landlord had to do the work to be compliant with its obligations to all lessees, it was difficult to see what else it could have done. It could not postpone the work, or require others to pay. Neither was the landlord required to exclude the tenants from the consultation and thereby run the risk that it could only recover £250 from them in the event that the lease did not end up being forfeited for any reason.
Requesting access to the flat did not waive the right for the same reason; however the tribunal did envisage that issuing proceedings to enforce the access right would have done. That leaves some uncertainty about where the line is to be drawn on this particular issue.
However, on 3 September, the landlord sent a service charge demand. This included an amount on account of estimated future expenditure. There is plenty of authority that demanding or accepting rent relating to a period after the right to forfeit has accrued will waive the right and likewise seeking payment on account for works to be done in the future raises the same problem. As from 3 September when the demand was sent, therefore, the landlord's right to forfeit had gone (and with it, the right for it to continue to charge the tenants for the costs of the proceedings which it was incurring, on the basis the lease only enabled the landlord to recover the costs incurred “in contemplation of forfeiture”).
The tribunal took a pragmatic approach which reflects the fact that the landlord cannot simply pretend that the lessee and the flat do not exist during the period between the right to forfeit arising and being in a position to go ahead with forfeiture. However, whilst it is comforting in some respects, it is still the case that landlords need to tread carefully in any case where they want to be able to forfeit the lease.
- Rent and service charge demands should be suspended, and payments should not be accepted. Any payments received should be returned (unless they relate to something which pre-dated the right to forfeit arising).
- The landlord should make it clear up front that the intention is to forfeit. The case demonstrated that having done this helped to argue that the actions had to be seen in context.
- Care needs to be taken with every action and letter; in an ideal world, there would be no communication and therefore no risk. However, in the real world sometimes these things cannot be avoided. Where there is no acceptable alternative but to get on and manage the building, this case supports the proposition that the right will not be waived.
- Proceedings should be issued for a determination of the debt sooner rather than later (to minimise the period when the landlord is at risk of waiver and also to minimise the time during which service charges and rent cannot be demanded).
When I did the session at our housing conference, what delegates found surprising was the extent to which the way you need to deal with long leaseholder breaches runs counter to what we try and do in all other dispute resolution contexts. We would normally make court action a last resort, and try and engage as much as possible with the tenant or leaseholder in as many different ways as possible to resolve the problem. However, when dealing with forfeiture, landlords need to be aware that every communication needs to be drafted or made with care. A landlord is actually well advised to issue proceedings sooner rather than later (and with minimum pre-action contact).
That said, forfeiture doesn’t need to be as scary as it sounds and it can be a very effective tool to deal with lessee breaches, not only in relation to unpaid charges but also other breaches such as anti-social behaviour. It is rare for forfeiture to actually result in a residential long lease being terminated, but the threat of it will normally mean the breach is put right.
For more information on this topic or to discuss this further please contact the Housing management team.