Property Matters September 2007

Forfeiture Of Commercial Premises – Part 2: Proposed Reforms

In the last Property Matters, we set out briefly the issues and pitfalls of which all landlords and tenants should be aware when considering forfeiture. The Law Commission has recognised that while the current system sometimes operates to prejudice tenants, it can equally be manipulated by tenants to the disadvantage of landlords.

It has therefore proposed that the law of forfeiture should be abolished and replaced with a new statutory scheme. The scheme will introduce a new concept of “tenant default” to define the circumstances in which a landlord may seek to terminate the tenancy before the end of its term. Within the new scheme there will be no need for a lease to contain an express right to forfeit, and the doctrine of waiver will be abolished in its entirety. In this issue, we focus on the proposals which the Law Commission has made for the new statutory scheme.

Tenant default notice: the new Section 146 notice
A landlord wishing to terminate a tenancy before the end of its term because of tenant default will have to warn the tenant of the impending action by giving a written notice, called a “tenant default notice”. This is very like the present notice under section 146 of the Law of Property Act 1925, but the requirement to serve a section 146 notice is subject to exceptions, notably in the case where the default consists of arrears of rent. No such exceptions apply to a tenant default notice. Also, unlike a section 146 notice, the landlord will also have to serve the tenant default notice on any parties holding derivative interests, such as sub-tenants or mortgagees.

The tenant default notice will have to be served within a statutory time limit and will have to set out the details of the breach of which the landlord complains, any remedial action required and the date by which the remedial action must be taken. The landlord will not be able to take any further steps towards terminating the tenancy until the date specified in the tenant default notice has passed.

Termination claim by the landlord: the new forfeiture proceedings
If the tenant does not undertake the remedial action required by the tenant default notice by the date specified within it, the landlord will be able to make a termination claim to the court. If the court is satisfied that there has been tenant default, it will be able to make a variety of orders. Possible orders include:

• A termination order - this will end the tenancy on the date specified in the order.
• A remedial order – this will set out what the tenant must do to remedy the default and the date by which it must be remedied. Such an order will not affect the continued existence of the tenancy, and the landlord’s claim for a termination order will be automatically stayed for a period of three months.
• An order for sale – this will require the tenancy to be sold and the proceeds distributed between the landlord and tenant. Such an order will be most appropriate where the tenancy in question is a significant capital asset, which if made the subject of a termination order, would provide a disproportionate windfall to the landlord.
• A transfer order – this can only be applied for by the owner of a derivative interest, and will transfer the tenancy from the tenant to that owner.
• A new tenancy order - this too can only be applied for by the owner of a derivative interest, and will grant that owner a new tenancy of the whole or part of the demised premises.

Summary termination procedure: the new peaceable re-entry
The scheme provides an alternative procedure for a landlord to terminate a tenancy without the need to apply to the court. The Law Commission intends this alternative procedure to be used only where the tenant would have no realistic prospect of resisting a termination order, or where the premises have been abandoned.

The summary termination procedure will be commenced by the landlord serving on the tenant a summary termination notice. That notice will operate to bring the tenancy to an end one month after the notice is served.

The tenant may, however, resist the summary termination by applying to the court to discharge the notice. Such an application will suspend the termination of the tenancy until the application has been decided. In order to defend such an application successfully, a landlord will have to show that, had a termination claim been made, the court would have made a termination order and that there is no reason why the termination of the tenancy should not be disposed of summarily.

There are a number of restrictions upon the use by a landlord of the summary termination procedure. It will not be able to be used:

• Concurrently with the court-based procedure.
• Where someone is residing in the premises.
• Where the unexpired term of the tenancy is more than 25 years.
• Where the tenancy was granted for a term in excess of seven years and there are three or more years unexpired, and the default is a breach of a repairing covenant.

For six months after the summary termination of a tenancy, the former tenant (or the former owner of a derivative interest) will be able to apply to the court for a “post-termination order”. Although a court will not be able to revive the terminated tenancy when such an application is made, it might order the grant of a new tenancy, or require the landlord to pay compensation This procedure is effectively a statutory replacement for the present ability to apply for relief from forfeiture.

Timetable for reform
The Law Commission has long been campaigning for reform to the law of forfeiture, and attached a draft Landlord and Tenant (Termination of Tenancies) Bill to its full report. That draft Bill embodied the detail of the proposals which we have set out in broad terms above. There was no indication from Tony Blair’s government as to whether it intended to take up the Law Commission’s proposals and it will be interesting to see whether or not Gordon Brown’s government does so.

The present law is manifestly unsatisfactory, and the reform proposals represent a principled and logical set of measures, which would leave landlords with an effective remedy while giving tenants appropriate protection. Reforms of this technical nature are never near the top of any government’s agenda, but work their way through the system in the end. These ones are long overdue, and it is to be hoped they find their way into legislation in the near future.