9 - Lease Termination

Question 1

What are the different methods for termination of leases?

Answer 1

Effluxion of Time
- The lease ends at the end of the contractual term.
- Protected tenants can hold over after the term ends.

Break Clause
- A break clause generally requires positive action to terminate the lease.

Notice to Quit
- Applicable to periodic tenancies, where the landlord or tenant gives notice to end the tenancy.
- For protected tenancies, the landlord’s notice ends the tenancy, but the tenant can hold over.

Surrender
- The tenant gives up their leasehold interest to the landlord with the landlord’s agreement.
- This is possible even with protected tenancies.

Merger
- The tenant acquires the landlord’s interest, or a third party acquires both interests.
- The lease ends as the leasehold and freehold (or superior interest) merge, regardless of tenancy protection.

Question 2

How does effluxion of time terminate a fixed-term tenancy, and what happens if the tenant remains in occupation?

Answer 2

A fixed-term tenancy without security of tenure expires at the end of its contractual term.
- The landlord can require the tenant to vacate.
- If the tenant refuses, they can be treated as a trespasser.

If the landlord consents to the tenant remaining, the tenant becomes a tenant at will and is not holding over.
- If the landlord accepts rent, the tenancy at will may convert to a periodic tenancy.
- Landlords should exercise care when accepting rent to avoid unintended periodic tenancies.

Example: A tenant with a 5-year lease of a warehouse (contracted out) remains after expiry. The landlord accepts monthly rent of £800 plus VAT.
This could create a monthly periodic tenancy, allowing the tenant to claim security of tenure if otherwise qualified.

Question 3

How does a break clause operate to terminate a fixed-term tenancy?

Answer 3

A fixed term tenancy may contain a break clause. A break clause allows the lease to be ended before the contractual term ends.
- If the tenant exercises the break, it is effective even for a protected tenancy.
- If the landlord exercises the break, it ends the contractual term, but the tenant may still hold over.
- For a landlord’s break to be effective, a lease that would otherwise be protected must be contracted out.

Example: A tenant has a 10-year protected lease with a mutual break clause at 5 years. The landlord exercises the break.
The tenant remains in occupation (holds over), effectively continuing as if holding over from a 5-year lease term.

Question 4

What are the key rules for notice to quit in periodic tenancies, and how does the notice period vary based on the tenancy?

Answer 4

Periodic tenancies cannot be contracted out but may not qualify as protected tenancies (e.g., non-commercial or service tenancies).

Notice periods, unless otherwise specified in the agreement, depend on the tenancy period:
- Weekly: 4 weeks (residential) or 1 week (other tenancies).
- Monthly: 1 month.
- Quarterly: 1 quarter.
- Yearly: 6 months.

The notice must specify a date for vacating, which must fall on the first or last day of the tenancy period.
For example, if a tenancy runs from the 15th of one month to the 14th of the next, notice must expire on the 14th or 15th.

Question 5

How does notice to quit apply to protected periodic tenancies, and what additional steps must a landlord take?

Answer 5

For protected periodic tenancies:
- A landlord’s notice to quit ends only the periodic tenancy.
- The tenant can hold over and remain in occupation.

A landlord wishing to recover possession must:
- Serve a hostile section 25 notice with statutory grounds.
- This must provide 6 to 12 months’ notice and can double as a notice to quit if it ends on the first or last day of the tenancy period. Alternatively, a separate notice to quit may be served.

Tenants:
- May serve notice to quit to vacate, whether the tenancy is protected or not.
- However, tenants of protected periodic tenancies cannot serve a section 26 notice.

Question 6

What is an express surrender of a tenancy, and why might it occur?

Answer 6

An express surrender occurs when both landlord and tenant agree to end a fixed-term tenancy early, requiring a deed.

Reasons for surrender:
- Tenant no longer needs the premises for business.
- Landlord requires the premises for redevelopment or other purposes.

Financial considerations:
- A premium may be paid depending on who benefits more.
- A reverse premium is paid by the tenant to give up its interest.

Example: A tenant with a 10-year lease (7 years left) wants to leave due to unprofitability.
The landlord may require a reverse premium to agree to the surrender.

Question 7

What is surrender by operation of law, and how does it affect protected tenancies?

Answer 7

Occurs when landlord and tenant act inconsistently with the tenancy continuing, e.g., the landlord accepts the keys as the tenant vacates permanently.

Protected tenancies:
Both express surrender and surrender by operation of law can terminate a protected tenancy.
Advance agreements to surrender require a notice and declaration process similar to contracting out.

Example:
A protected tenant agrees to surrender in a month, allowing the landlord to grant a new lease.
The notice and declaration procedure must be followed for the agreement to be valid.

Question 8

What is a merger?

Answer 8

A merger happens when either the tenant acquires the landlord’s superior interest (the opposite to a surrender), or a third party acquires both.

If a property has a leasehold and freehold interest which is acquired by a third party, the leasehold mergers into the freehold.

Question 9

Provide a summary of termination of leases.

Answer 9

• A lease ends by effluxion of time when the contractual term ends.
• A break clause ends a lease early.
• A notice to quit is used to end a periodic tenancy, and the notice period depends on the period of the lease.
• An express surrender is where the tenant gives up its leasehold interest to the landlord by deed.
• A surrender by operation of law is where both landlord and tenant have behaved in a way that indicates that the tenancy is no longer in existence.
• A merger is when either the tenant acquires the superior interest and it merges with the tenant’s leasehold, or a third party acquires both superior interest and the leasehold interest.

Question 10

What are the landlord’s remedies when the tenant breaches the lease?

Answer 10

A landlord has several remedies for a tenant’s breach, chosen based on strategic factors.
These disputes are often handled by specialist teams in moderate-to-large firms due to their complexity.

Including:
- Damages - For breach of covenant.
- Action in debt - For unpaid rent, service charges, or insurance rent.
- Guarantor and rent deposit
- Commercial and rent arrears recovery (CRAR)
- Equitable remedies (specific performance, injunction).

Question 11

When can a landlord claim damages for a tenant’s breach, and what are the considerations?

Answer 11

A tenant’s covenants are enforceable as contractual obligations. The landlord may bring court proceedings to claim damages.

Measure of damages: To restore the landlord to the position they would have been in but for the breach.

Limitations:
- Court proceedings are costly and time-consuming.
- Recovery of costs may not be guaranteed.
- Specific challenges arise with damages for breaches of repairing covenants.

Question 12

What is action in debt, and what are its advantages and limitations?

Answer 12

Action in debt involves court proceedings to recover unpaid sums such as rent, service charge, or insurance rent.

Key points:
- Limited to rent due in the six years before the claim.
- Relevant to long leases with unpaid ground rents. Less so commercial rack rent leases where landlord is unlikely to allow six years of rent arrears to build.

Advantages:
- May preserve landlord/tenant relationships by giving tenants time to pay.

Additional option:
- If the current tenant is an assignee, pursue a former tenant under an authorised guarantee agreement or for liability under old leases.
- The former tenant may request a lease if paying current tenant debts.

Question 13

How can a landlord use a guarantor or rent deposit to address tenant breaches?

Answer 13

If a landlord had concerns about the tenant’s or assignee’s covenant strength, they might have obtained:

A guarantor:
- The guarantor covers all tenant obligations, including unpaid rent and breaches of covenants.

A rent deposit:
- The landlord can draw on the deposit (e.g., up to six months’ rent) for arrears.
- The tenant must top up the deposit after withdrawals, helping to maintain the landlord/tenant relationship if the breach is isolated.

Question 14

What is Commercial Rent Arrears Recovery (CRAR), and when can it be used?

Answer 14

CRAR is a self-help remedy for recovering rent arrears, quicker and cheaper than court action.

Conditions for use:
- Premises must be purely commercial (e.g., not part residential).
- At least seven days’ principal rent is owed (including VAT and interest).
- The lease must not have been forfeited.

Note: CRAR cannot recover service charges or sums other than rent.

Question 15

What are the key procedural requirements for conducting CRAR?

Answer 15

Appointment of an enforcement agent: Must have a court-issued certificate or exemption (e.g., police officer).

Notice requirements: Seven clear days’ notice (excluding Sundays and bank holidays) must be given, including:
- Debt amount and repayment details.
- Details of enforcement power and agent contact information.

Seizure and sale of goods:
- After notice expiry, the enforcement agent can seize tenant goods up to the debt value.
- A further seven clear days’ notice must be served before selling seized goods.

Question 16

What are equitable remedies available to landlords for tenant breaches, and how are they applied?

Answer 16

Equitable remedies include injunctions and specific performance, which are:
- Discretionary and subject to the court’s decision.
- Limited in use due to high costs and restrictive application.

Specific performance:
- Orders the tenant to do something they have failed to do.
- Rarely granted, especially for breaches of repair, except in exceptional cases where the lease lacks other remedies.

Injunction:
- Orders the tenant to stop doing something.
- May be granted, for example, to prevent unlawful assignment of the lease.
- Unlikely to be granted if the unlawful act (e.g., assignment) has already occurred.

Question 17

Provide a summary of a landlord’s remedies for tenant’s breach of a lease.

Answer 17

• The landlord may pursue court proceedings for debt if rent (or other sums) are unpaid, or for damages if the tenant has breached other obligations of the lease.
• The landlord may pursue a former tenant under an old lease or if an authorised guarantee agreement has been given with a new lease.
• The landlord may use a rent deposit to cover rent arrears.
• The landlord may pursue a separate guarantee to pay rent and be responsible for any other of the tenant’s obligations (depending on the contractual terms of the guarantee).
• Commercial rent arrears recovery is a self-help remedy for recovering rent where the requirements are met.
• Specific performance and injunctions are equitable remedies that may be of use rarely.

Question 18

What is forfeiture in the context of a landlord’s remedies, and how is it used?

Answer 18

Forfeiture: The landlord’s right to re-enter the premises and terminate the lease early, either during the contractual term or any period of holding over.

Can encourage tenant compliance, but in difficult rental markets, retaining a non-compliant tenant may be preferable to having no tenant.

Key term: Forfeiture and re-entry are often used interchangeably.

Question 19

What are the conditions under which a landlord can exercise forfeiture?

Answer 19

Forfeiture is not automatic; it must be expressly allowed by the lease.

Typically permitted for:
- Non-payment of rent: Landlord can forfeit as soon as the lease allows.
- Breach of tenant obligations: Requires a section 146 notice under the Law of Property Act 1925, giving the tenant reasonable time to remedy the breach, failing which the landlord can forfeit.
- Insolvency events: Includes financial difficulties like administrative receivership or tenant bankruptcy.

Key term: An insolvency event includes events indicating financial distress, such as voluntary arrangements or the appointment of an administrative receiver.

Question 20

Why is forfeiture considered an effective remedy, and how can it be enforced?

Answer 20

Impact on tenant: Causes significant embarrassment to the tenant’s business, especially if bailiffs attend early, change locks, and post a notice, preventing staff, customers, or tradespeople from entering.
This can pressure the tenant to settle debts quickly to regain access and protect their reputation.

Methods of enforcement:
- Peaceable re-entry: Instructing bailiffs directly.
- Risks: Tenant may legally challenge the forfeiture if it has not been carried out lawfully, especially if there is loss or damage to stock, equipment, or belongings.
- Court order for forfeiture: More costly and time-consuming but provides legal certainty, making it harder for the tenant to dispute lawfulness.

Question 21

How can a landlord lose the right of forfeiture, and what are the conditions for an implied waiver?

Answer 21

Waiver of forfeiture: Occurs if the landlord acknowledges the lease’s continuing existence despite the breach.

Implied waiver conditions:
- The landlord performs an unequivocal act recognising the lease’s continuation.
- The act is done with knowledge of the breach.
- The act is communicated to the tenant.
- Intention: The landlord’s intent is irrelevant.

Example: A tenant unlawfully assigns the lease. Despite knowing, the landlord accepts rent from the new tenant, waiving the right of forfeiture.

Question 22

How do ‘once and for all’ breaches and continuing breaches differ regarding forfeiture?

Answer 22

Once and for all breaches: Once waived, the right of forfeiture for these breaches is permanently lost. Examples include:
- Non-payment of rent.
- Unlawful assignment or underletting.
- Insolvency events.

Continuing breaches: The right of forfeiture arises daily while the breach persists, even if previously waived. Examples include:
- Failure to keep premises in repair.
- Breach of the user covenant.
- Failure to comply with an insurance obligation.

Question 23

What is relief from forfeiture, and who can apply for it?

Answer 23

Arises as soon as the landlord serves a s146, starts process of forfeiture, whether peaceful or by issuing proceedings.

Relief from forfeiture: A discretionary remedy allowing the tenant to restore the lease as if forfeiture had not occurred. The court’s aim is to restore the parties’ original position.

Non-payment of rent: Relief is typically granted if the tenant pays all arrears and landlord’s costs.

Other applicants:
- Parties with an interest in the tenant’s lease, such as mortgagees or undertenants, can apply for relief.
- An undertenant may become a direct tenant of the landlord.

Question 24

Provide a summary of forfeiture as a landlord’s remedy.

Answer 24

• A commercial lease will usually provide that the landlord can forfeit the lease if the rent is unpaid when due (or following a grace period), if the tenant breaches other obligations, and if the tenant suffers an ‘insolvency event’.
• For non-payment of rent, the landlord can proceed to peaceable re-entry of the premises or issuing proceedings for forfeiture.
• For any other breaches, the landlord must serve a section 146 notice detailing the breach and giving the tenant a reasonable time to remedy the breach before proceeding to peaceable re-entry or proceedings for forfeiture.
• If the landlord acts in a way that acknowledges the ongoing existence of the lease, it may waive the right to forfeit.
• A tenant, and others deriving an interest from the lease, may apply for relief from forfeiture as soon as the landlord takes action to forfeit.
• Relief from forfeiture is a discretionary remedy, and if granted, restores the forfeited lease and aims to put the parties back in the position they would have been if the forfeiture had not taken place.

Question 25

Why is addressing breaches of repair covenant different from other breaches?

Answer 25

Nature of breaches: Most tenants will have some form of repair breach, and such breaches can usually be remedied.

Legal approach: The law is more lenient with tenants for repair breaches compared to other breaches, such as non-payment of rent.

Limitations: Neither forfeiture nor damages proceedings are as straightforward as for other breaches.

Question 26

What are the steps and protections for forfeiture due to a breach of repairing obligation?

Answer 26

Steps for forfeiture:
- Landlord must serve a section 146 notice detailing the breach, the required remedy, and give the tenant reasonable time to remedy it.

LPRA 1938 protections:
- Applies to leases of seven years or more with at least three years remaining.
- Tenant has 28 days to serve a counter-notice, requiring the landlord to seek court approval for forfeiture (this is not easy).
- Section 146 notice must inform the tenant of these rights.

Question 27

What challenges does a landlord face in recovering damages for breach of repairing obligation?

Answer 27

Section 146 notice: Landlord must first serve notice and allow 28 days for a counter-notice before issuing proceedings - cannot issue proceedings for damages before doing this.

Measure of damages: Limited to the loss of value to the landlord’s reversion, not the cost of repairs.

Example: £8,000 repair cost may result in only £1,000 damages if the freehold’s value is reduced by just £1,000.

Limitations: Neither damages nor forfeiture provide satisfactory remedies.

Question 28

How does a Jervis v Harris clause help landlords address repairing breaches?

Answer 28

Self-help remedy: Landlord can enter the premises, carry out repairs, and recover the costs from the tenant.

Advantages:
- Avoids section 146 notice, preventing tenant’s counter-notice.
- Recovery is treated as a debt, allowing full cost recovery.

This type of clause will need to be entered into the lease. FRI leases almost certainly include this.

Example: Landlord could recover the full £8,000 repair cost, rather than £1,000 damages through court proceedings.

Question 29

Provide a summary of breach of repair covenant (Termination).

Answer 29

• A landlord seeking to forfeit the lease for a breach of repair will have to serve a section 146 notice as with other breaches (other than non-payment of rent).
• If the tenant has a lease with a term of 7 years or more, and there is still 3 years or more to run, it has 28 days to serve a counter-notice, which means that the landlord must seek leave from the court to continue with forfeiture.
• A landlord seeking damages for repair must also serve a section 146 notice, and the above provisions regarding counter-notice also apply where the lease qualifies.
• Specific performance is rarely given for a breach of repair.
• The best remedy for the landlord is a self-help clause (Jervis v Harris clause) in the lease.
• This enables the landlord to carry out the repairs itself and recover the cost of doing so from the tenant in full as a debt.

Question 30

What are the main advantages, disadvantages, and uses of debt action, CRAR, and forfeiture for non-payment of rent?

Answer 30

Debt Action:
- Advantages: Clear debt amount; separates the debt from landlord/tenant relationship.
- Disadvantages: Costly and time-consuming court process.
- Use: Any lease sum, e.g., principal rent or service charge.

CRAR (Commercial Rent Arrears Recovery):
- Advantages: Quick, efficient, no court involvement.
- Disadvantages: Must follow strict procedures.
- Use: Limited to principal rent, not other sums treated as rent.

Forfeiture:
- Advantages: Quick, efficient, and can motivate tenant compliance.
- Disadvantages: Risk of losing tenant, especially in a tenant-friendly market.
- Use: May extend to other sums treated as rent, depending on lease terms.

Question 31

In what circumstances might a landlord choose CRAR over other remedies for rent arrears?

Answer 31

• In a tenant-friendly market, where retaining the tenant is important.
• When urgent cash flow is required, and court action (debt recovery) is too slow.
• When the tenant has valuable goods (e.g., jewellery) that can be seized efficiently.
• CRAR avoids court involvement, making it quicker and less costly.

Question 32

What are the advantages, disadvantages, and uses of damages, forfeiture, self-help clauses, and specific performance for repairing breaches?

Answer 32

Damages:
- Advantages: Limited; often negligible impact.
- Disadvantages: Requires a section 146 notice; tenant may serve a counter-notice; damages are capped at the reduction in the landlord’s reversion value.
- Use: Rarely practical; court leave is granted only in urgent cases.

Forfeiture:
- Advantages: Limited benefits, similar issues as damages.
- Disadvantages: Section 146 notice and counter-notice apply.
- Use: Rarely suitable unless urgent repair issues arise.

Self-help (Jervis v Harris) Clause:
- Advantages: Quick, efficient, no court involvement; full repair cost recoverable as a debt.
- Disadvantages: Must align with lease terms; excessive repairs may overstep the landlord’s powers.
- Use: Requires a clause in the lease.

Specific Performance:
- Advantages: A last-resort option when no other remedy is viable.
- Disadvantages: Rarely granted; requires exceptional circumstances.
- Use: Discretionary remedy, seldom used.

Question 33

What are the advantages, disadvantages, and uses of damages, forfeiture, specific performance, and injunctions for all other breaches?

Answer 33

Damages:
- Advantages: Helpful for separating issues while maintaining the landlord/tenant relationship.
- Disadvantages: May be costly, protracted, and no guarantee of recovering costs.
- Use: Appropriate for any breach that can be compensated financially.

Forfeiture:
- Advantages: Effective in persuading tenant to comply.
- Disadvantages: Requires section 146 notice; risk of losing tenant.
- Use: Not suitable for minor breaches.

Specific Performance:
- Advantages: Can compel compliance with obligations beyond financial terms.
- Disadvantages: A discretionary remedy; challenging to persuade the court.
- Use: Cannot be used for continuing obligations.

Injunction:
- Advantages: Can prevent a tenant from breaching (e.g., prevent assignment).
- Disadvantages: Discretionary remedy, difficult to persuade court.
- Use: Used for intended breaches, like unlawful assignment or user clause violations.

Question 34

What are the advantages, disadvantages, and uses of remedies involving a guarantor and a former tenant?

Answer 34

Guarantor:
- Advantages: The guarantor may have better means to comply with the tenant’s obligations.
- Disadvantages: In some cases, the guarantor may end up taking on an overriding lease and becoming the tenant.
- Use: There must be a guarantor in place for this remedy to apply.

Former Tenant:
- Advantages: A former tenant may be better positioned to comply with obligations.
- Disadvantages: Similar to a guarantor, this can also lead to complications.
- Use: Requires a former tenant with an old lease or a new lease, along with an authorised guarantee agreement (AGA).

Question 35

What are the advantages, disadvantages, and uses of a rent deposit deed as a remedy?

Answer 35

• Advantages: Quick and efficient, it can help mitigate tenant cash flow issues by covering rent arrears.
• Disadvantages: The deposit is typically limited to a certain number of months’ rent, and it relies on the tenant topping up the deposit once used.
• Use: Generally, it only covers rent, not other obligations under the lease.

Question 36

Provide a summary of landlord’s strategy for remedying breaches.

Answer 36

• The choice of remedy will depend whether the breach is non-payment of rent, breach of the repairing covenant, or something else.
• Each remedy has advantages and disadvantages.
• This element is intended to illustrate how a landlord’s choice of remedy may vary depending on circumstances, but is simplified and is not intended to be exhaustive.
• Reaching the correct choice in practice may be much more subtle.