Relief from forfeiture – what happens if the tenant forgets to pay the rent?

If a tenant is not paying rent or service charges, or has breached other terms of the lease, the landlord has a right to end the lease by forfeiture.  This is an important protection for a landlord of commercial property, but it can seem harsh for a tenant whose business is going through a difficult patch or who has simply forgotten to make a payment.  If a landlord threatens to forfeit, the tenant needs prompt legal advice about what to do.

A recent case in the UK Supreme Court, The Manchester Ship Canal Company Ltd v Vauxhall Motors Ltd, is a reminder to landlords and tenants that forfeiture is a powerful remedy.

‘The threat of losing your business premises if you have not paid the rent will really focus a tenant’s attention’ says a Senior Associate in the commercial property team at Ashtons Legal in Ipswich.

‘In practice, most landlords would rather keep their tenant than go to the trouble and expense of forfeiting and finding a new tenant.  The law has built-in protections for the tenant, which give the tenant the chance to put the breach right and stop the threatened forfeiture.’

Before forfeiting the lease, the landlord must follow the correct statutory process: serving a formal notice (known as a section 146 notice) on the tenant; identifying the breach; requesting that the tenant remedies it; and setting a reasonable time for the tenant to comply.  If a tenant has simply forgotten to make a payment, this should be enough to prompt them to sort it out.  If a landlord claims the lease is forfeited without having served a notice, the tenant’s solicitor will be able to challenge the landlord.

If the tenant does not remedy the breach within the time set out in the notice, the landlord can take steps to bring the lease to an end.  At this point, the tenant’s solicitor will be checking to see whether the landlord has inadvertently waived the right to forfeit by doing something that recognises a continuing landlord and tenant relationship.  The most obvious example is accepting rent or some other payment.

Even if the landlord has correctly followed the relevant steps, it is not the end of the road for the tenant.  Because losing premises is such a serious penalty, the courts have a wide discretion to grant the tenant relief from forfeiture.  In practice this means the court can give the tenant a final chance to pay what it owes and put right any breaches in return for having the lease restored.

The court will look at a range of things before it decides whether to allow relief, including the tenant’s conduct, and the impact on the tenant of losing their premises compared to the impact on the landlord if relief is granted.  A tenant who has fallen behind with rent because their business is going through a difficult patch, but who has otherwise complied with the lease, is likely to get a more sympathetic hearing than a tenant who has regularly failed to do what the lease requires.

Sometimes a business will occupy property under a licence instead of a lease.  This is a less formal personal arrangement between the landowner and the occupier and does not give the occupier the same rights it would have as tenant under a lease.  In particular, someone occupying under a licence would not usually be able to claim relief if the licence was forfeited.

This issue has recently been examined, first in the Court of Appeal and now the Supreme Court, in a dispute over a licence allowing Vauxhall Motors to discharge water and effluent into the Manchester Ship Canal.  Vauxhall forgot to pay a small licence fee, so the landowner tried to forfeit the licence.  Both courts ruled that because Vauxhall had built the infrastructure used to discharge waste into the canal and had been given an exclusive right to use it, it was in possession and so should be allowed relief from forfeiture.  This was a striking decision, but the circumstances were very unusual.  Anyone occupying their business premises under a licence should still be aware that they probably would not get relief if the landowner forfeited the licence.

If a landlord threatens a tenant with forfeiture, the tenant’s solicitor will know what the tenant should do to protect their business premises.  Knowing the rules and acting promptly will give the tenant the best chance of success.  The ideal outcome for both landlord and tenant is that the tenant pays any outstanding rent or service charge and puts right any breaches of the lease, so that the landlord keeps its tenant and the tenant can get on with their business.