Chapter 11: Lease Termination Flashcards
Methods of termination
1.1 Introduction to methods of termination
A lease can come to an end in various ways:
* Effluxion of time means that the lease ends at the end of the contractual term. Note that a protected tenant will be able to hold over after the end of the contractual term.
* A break clause generally requires positive action by a party to end the lease.
* Surrender means that the tenant gives up its leasehold interest to the landlord (with the
landlord’s agreement).This is possible even with a protected tenancy
1.1 Introduction to methods of termination
- Notice to quit for a periodic tenancy means either the landlord or tenant giving notice that
they intend the tenancy to end. For a protected tenancy, a landlord’s notice to quit will end
the periodic tenancy, but the tenant can hold over. - Merger means either that the tenant acquires the landlord’s interest, or a third party acquires both interest. Either way, the freehold (or superior interest) and the leasehold are merged and come to an end.This would happen whether the tenancy is protected or not.
1.2 Effluxion of time
A fixed term tenancy which does not have security of tenure will expire at the end of the contractual term. The landlord can require the tenant to vacate the premises, and if the tenant refuses, the landlord can treat the tenant as a trespasser.
1.2 Effluxion of time
If the landlord consents to an unprotected tenant remaining in occupation, the tenant is not
holding over, but would be treated as a ‘tenant at will’. If the landlord accepts rent, then the tenancy at will may be converted to a periodic tenancy. A
landlord needs, therefore, to exercise care.
Example
A tenant has a five year lease of a warehouse unit that is contracted out, and the lease has
expired. The landlord continues to accept a monthly rent of £800 plus VAT. The tenant is likely to be able to claim a monthly periodic tenancy and, if the tenant otherwise qualifies, will acquire security of tenure.
1.3 Break clause
A fixed term tenancy may contain a break clause, which allows the lease to be ended before the
end of the contractual term. If the tenant exercises a break, then it is effective with a protected tenancy.
However, if the landlord exercises a break (either a landlord only or mutual break clause), it only operates to bring the contractual term to an end. The tenant may still hold over.
1.3 Break clause
Therefore if a landlord’s break clause is to be effective, a lease that would otherwise be protected must be contracted out.
Example
A tenant has a ten year protected lease with a mutual break at 5 years. The landlord validly
exercises the break clause. The tenant remains in occupation (holds over), and the effect is as if the tenant has held over from a 5 year lease term.
1.4 Notice to quit
A periodic tenancy cannot be contracted out, but of course not every periodic tenancy will qualify
as a protected tenancy (eg, a non-commercial tenancy or a service tenancy). Unless there is a tenancy agreement that specifies otherwise, the notice period required depends on the period of tenancy:
1.4 Notice to quit
Period of tenancy // Notice Period
Weekly: Residential tenancy: 4 weeks
Other tenancies: 1 week
Monthly: 1 month
Quarterly: 1 quarter
Yearly: 6 months
1.4 Notice to quit
A notice to quit gives the other party a specific date on which to vacate, which must expire on the
first day or the last day of the tenancy period.
For example, if the tenancy runs from the 15th day of each month to the 14th day of the next
month, then the notice period may end on either the 14th or 15th.
1.4.1 Notice to quit and security of tenure
If the periodic tenancy is a protected tenancy, then the landlord may still serve notice to quit, but
it will only end the periodic tenancy itself. The tenant will be entitled to hold over. The tenant may also serve notice to quit if it wishes to leave the premises. This is effective whether the tenancy protected or not
Hostile Section 25 Notice
Therefore, a landlord wishing to recover possession from a protected tenant under a periodic tenancy will need to serve a hostile section 25 notice supported by one or more of the statutory
grounds.
This must follow the notice requirements of s25 (ie, 6 to 12 months’ notice of the termination date)
but may double as a notice to quit provided it also, for example, ends on the first or last day of the period. Alternatively, a separate notice to quit may be served.
Cannot serve a s 26 notice
Note that although the tenant of a protected periodic tenancy can hold over, it cannot serve a
section 26 notice.
1.5 Surrender
A fixed term tenancy may be brought to an end earlier than the end of the contractual term
provided both landlord and tenant agree. The tenant gives up its leasehold interest to the
landlord. An express surrender must be made by deed.
The tenant may want to surrender if it no longer needs the premises for the purposes of its
business. The landlord may want the tenant to surrender if it needs the premises back to
redevelop or for other purposes.
Reverse Platinum
A premium may be payable for the surrender, but the direction will likely depend who has most to
gain. A premium paid by the tenant to give up its interest is known as a reverse premium.
Example
A tenant has a ten year lease with no break, and seven years left to run. The tenant wants to leave
the premises as its business is unprofitable, but the landlord will lose the guarantee of seven years’
rent. The tenant will likely pay the landlord a reverse premium in this situation.
Surrender by operation of law
A surrender by operation of law arises when the landlord and tenant act in way that is
inconsistent with the continuation of the tenancy. For example, the landlord accepts the keys
from the tenant with an understanding that the tenant is leaving the premises permanently.
Agreement to surrender
Either an express surrender by deed or a surrender by operation of law are effective even if the
tenancy is protected. If, as sometimes happens, there is an agreement to surrender a protected tenancy in advance of the deed, however, there is a procedure similar to contracting out which must be followed.
Example
A protected tenant agrees with the landlord to surrender its lease in a month’s time (to tie in with
the landlord granting a lease to a new tenant). The parties must follow a notice and declaration procedure for the agreement to surrender similar to the contracting out of a new tenancy
1.6 Merger
A merger happens when either the tenant acquires the landlord’s superior interest (the opposite to
a surrender), or a third party acquires both.
1.7 Summary
- 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.
1.7 Summary
- 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.
2 Landlord’s remedies
When a tenant breaches the lease, the landlord will have a choice of different remedies that it
may take. The choice that the landlord makes depends on a number of factors, and this can be quite a strategic area of law.
2 Landlord’s remedies
For this reason, in firms of moderate to large size, landlord and tenant disputes are usually dealt
with by a specialist team, rather than lawyers who practise generally in commercial property.
2.1 Damages
A tenant’s covenants are enforceable as a matter of contract between the parties, and the
landlord can bring proceedings in the court to claim for damages. The measure of damages is to put the landlord back into the position they would have been were it not for the breach of covenant.
2.1 Damages
Court proceedings can be costly and protracted, and the landlord may not be able to recover its
costs. There are particular issues relating to damages for breach of the repairing covenant.
2.2 Action in debt
A landlord can issue court proceedings to recover a debt, such as unpaid rent, service charge or
insurance rent. An action for debt is limited to rent due in the six years before the issue of proceedings. Any earlier outstanding rent is irrecoverable. This is unlikely to be significant with a commercial rack rent lease (where the landlord is unlikely to allow six years of rent arrears to build up), but is relevant to long leases, where low ground rents often go unpaid.
2.2 Action in debt
Again, the disadvantage is that court claims may be costly and time consuming. If the current tenant is an assignee, another possibility is to pursue the former tenant, if it is an old lease or the former tenant gave an authorised guarantee agreement (see section on assignment). In certain instances, a former tenant who is paying the current tenant’s debts may apply to the landlord to be granted a lease
2.3 Guarantor and rent deposit
If the landlord had concerns about the covenant strength of a tenant or assignee at the time of
the grant or assignment, the landlord may have obtained a guarantor or rent deposit from the
tenant. The landlord can rely on the contractual terms of a guarantee to claim its losses from the
guarantor.
2.3 Guarantor and rent deposit
A guarantee will typically cover all the tenant’s obligations, so that the landlord is not limited to
pursuing unpaid rent, but also any breach of the tenant’s covenants. The landlord can draw on a rent deposit (usually limited, say to six months’ rent) if there are any arrears.
Top up deposit after withdrawal
The tenant will be required to top up the deposit after a withdrawal. If the breach is an isolated
occurrence, this can provide a useful cushion while preserving the landlord/tenant relationship.
2.4 Commercial rent arrears recovery (CRAR)
Commercial rent arrears recovery (CRAR) is a self-help remedy (similar to the old common law
remedy of distress which it replaced on 6 April 2014).
Self-help remedies have the advantage of being generally cheaper and quicker than court
proceedings.
CRAR may be used where:
- the premises are purely commercial (it cannot be used, for example, where the premises comprise a shop and residential flat)
- a minimum of seven days’ principal rent is owed (it can’t be used to recover service charge or any other sum reserved as ‘rent’ but does include VAT and interest)
- the lease has not been forfeited
2.5 CRAR requirements
As it is a self-help remedy, there are strict requirements to the way in which CRAR must be
conducted:
* the landlord must appoint a enforcement agent who either has the required certificate from
the court or is exempt from the requirement (eg, a police officer)
* Seven clear days’ notice must be given of the intention to enter the tenant’s premises (clear
days exclude Sundays and bank holidays)
2.5 CRAR requirements
- The notice must include certain details, such as the amount of the debt and how to repay it, details of the power being used to enforce the debt, and contact details for the enforcement agent
- If the notice expires without repayment of the debt, the enforcement agent can enter the premises and take control of goods belonging to the tenant up to the value of the debt owed.
- The landlord must serve a further seven clear days’ notice if it intends to sell any of the seized
goods.
2.6 Equitable remedies
Both injuctions and specific performance
Both injunctions and specific performance are equitable remedies. Aside from the cost issue of
court proceedings, equitable remedies are discretionary. Their use as a remedy against tenant
breaches is limited.
Specific Performance
Specific performance is an order to the tenant to do something that it has not done. Specific
performance has been granted for a tenant to put premises in repair, but this was an exceptional
case (the lease did not provide other alternatives). Otherwise, specific performance will rarely be available to a tenant, particularly for a breach of
repair.
Injunction
An injunction is an order to the tenant not to do something. The landlord may be able to get an injunction, for example, if aware that the tenant intends to assign the lease unlawfully. However, the landlord is unlikely to get an injunction against an assignment that has already taken place
2.7 Summary
- 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.
2.7 Summary
- 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.
Forfeiture
3.1 Forfeiture as a landlord’s remedy
Forfeiture is the right of the landlord to re-enter the premises and take them back from the tenant. It brings the lease to an end before the contractual term (or during any period of holding over).
3.1 Forfeiture as a landlord’s remedy
The threat of forfeiture may spur a tenant into compliance with its obligations, but in a difficult
rental market, a tenant who breaches some of its obligations may be better than no tenant at all!
The terms forfeiture and re-entry are often used interchangeably
3.2 The right to forfeiture
Not an automatic right
Forfeiture is not an automatic right, and is only permitted insofar as the lease provides for it.
A commercial lease will typically allow the landlord to forfeit the lease if the tenant fails to pay the
rent (usually after a period of grace), breaches its obligations under the lease, or there is an
‘insolvency event’.
Non-payment of rent
For non-payment of rent, the landlord is entitled to forfeit as soon as the lease allows. For any
other breach of the tenant’s obligations, the landlord must serve a section 146 notice (Law of Property Act 1925). This notice details the alleged breach and gives the tenant a reasonable opportunity the opportunity to remedy it, failing which the landlord will be entitled to forfeit
Insolvency event:
This term is usually used in a lease to describe a range of events that indicate financial difficulties, such as the appointment of an administrative receiver, or with an individual tenant, a voluntary arrangement or bankruptcy
3.3 Why can forfeiture be an effective remedy?
Forfeiture can cause embarrassment to a tenant’s business. Typically, the landlord will arrange for
a bailiff to attend the premises in the early morning and change the locks, and put a notice on the
door.
Any staff, customers or tradespeople will not be able to enter the premises. The tenant will likely want to minimise the damage to their business’s reputation by settling the debt and regaining access to the premises.
3.3 Why can forfeiture be an effective remedy?
Forfeiture can be achieved by peaceable re-entry, ie, by simply instructing the bailiff as above. There is a risk that the tenant may legally challenge this if it has not been carried out lawfully or if the tenant’s stock, equipment or belongings are lost, damaged or stolen.
Alternatively, the landlord can apply to the court for an order for forfeiture. This costs more and takes longer than peaceable re-entry. However, it makes it more difficult for the tenant to challenge the forfeiture on the grounds of lawfulness.
3.4 Waiver of the right of forfeiture
If the landlord acts in a way that acknowledges the continuing existence of the lease, the landlord
risks losing the right of forfeiture.
An implied waiver of the right of forfeiture can arise if:
* the landlord does some unequivocal act recognising the continuing existence of the lease;
* with knowledge of the breach in question; and
* communicates that act to the tenant.
The intention of the landlord is irrelevant.
Example
A tenant has unlawfully assigned the lease to a new tenant. The lease would allow for forfeiture in
that instance. The landlord knows that the assignment has gone through but accepts rent from
the new tenant. The landlord has waived the right of forfeiture against the new tenant
4 Type of breach
Once and for all breach
If a breach is a ‘once and for all breach’, once the landlord waives the right of forfeiture, it will
never be able to regain it for that breach.
Examples include:
* non-payment of rent
* an unlawful assignment or underletting
* an insolvency event
Continuing breach
Other breaches are ‘continuing breaches’ meaning that each day that the breach continues, the
landlord regains the right of forfeiture.
Examples:
* failure to keep the premises in repair
* breach of the user covenant
* failure to comply with an insurance obligation
Example
A tenant has let the premises fall into disrepair. The landlord may, for example, accept rent from
the tenant. As it is a continuing breach, each day that the tenant fails to repair the premises, the landlord has a new right of forfeiture.
4.1 Relief from forfeiture
As soon as the landlord serves a section 146 notice or starts the process of forfeiture, whether by peaceable re-entry or issuing proceedings, the tenant is entitled to apply for relief from forfeiture. Relief from forfeiture is a discretionary remedy. If the court award the tenant relief from forfeiture, then the lease is restored as if forfeiture had never taken place.
4.1 Relief from forfeiture
The aim of the court is to put the parties back into the position in which they would have been had
forfeiture not taken place. If forfeiture is for non-payment of rent, then the tenant will normally be able to get relief from forfeiture by settling all rent arrears and landlord’s costs.
Other parties who derive interests
Other parties who derive an interest from the tenant’s lease, such as a mortgagee or undertenant
are also able to seek relief from forfeiture. In the case of an undertenant, this may result in the
undertenant becoming a direct tenant of the landlord.
4.2 Summary
- 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
4.2 Summary
- 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 reentry or proceedings for forfeiture.
4.2 Summary
- 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.
5 Breach of repair covenant
From the landlord’s point of view, breach of repair is a special case that has its own issues. Neither forfeiture nor proceedings for damages are as straightforward as they are for other breaches
Rationale
The rationale for this is that almost all tenants will be in breach of their repairing obligation in
some way. Repairing breaches are, by their nature, capable of being put right (ie, being repaired).
The law therefore, is more generous to tenants in this than other breaches.
5.1 Forfeiture for breach of repairing obligation
As with other tenant breaches (apart from non-payment of rent), the landlord must serve a
section 146 notice of its intention to forfeit, detailing the remedy and giving the tenant reasonable
time to remedy the breach. The Leasehold Property (Repairs) Act 1938 (LPRA 38) applies to leases that meet the following criteria:
5.1 Forfeiture for breach of repairing obligation
- the lease is for a term of seven years or more; and
- there are at least three years of the term left to run;
If so, the tenant has 28 days to serve a counter-notice. This means that the landlord must get
leave from the court before proceeding (and this is not easy).
The landlord must advise the tenant of these rights in the section 146 notice.
Assessment focus point
Remember that you do not need to know the titles of statutes, but you do need to know what
they do.
5.2 Damages for breach of repairing obligation
Similarly with forfeiture, a landlord cannot issue proceedings for damages for a repairing
obligation until it has served a section 146 notice, and given the tenant 28 days to serve a counter-notice.
5.2 Damages for breach of repairing obligation
A further difficulty with damages is that even if the landlord gets through the counter-notice
hurdle, the measure of damages is the loss of value to the landlord’s reversion, not the cost of
putting the premises into full repair
Example
A landlord’s inspection of premises reveals damage to the internal walls of the premises that the
tenant has neglected to repair. The repairs would cost £8,000, but the landlord’s freehold is
estimated to be only £1,000 less valuable. The landlord’s damages would be limited to £1,000
Example
Neither damages nor forfeiture therefore offer a very satisfactory solution to the landlord.
Specific performance is another possibility, but this is rarely granted for wants of repair (except in
exceptional circumstances, such as when the lease contains no remedy for repairing breaches)
5.3 So what does the landlord do?
A commercial lease will almost always contain a self-help clause (also known as a Jervis v Harris
clause) that avoids the difficulties with other remedies.
A Jervis v Harris clause will give the landlord the right to:
* enter the property
* carry out any repairs
* recover the cost of doing so from the tenant.
5.3 So what does the landlord do?
There is no need for the landlord to serve a section 146 notice (and therefore no opportunity for
the tenant to serve a counter-notice).
The cost of carrying out the repairs is treated as a debt to the landlord, not damages, and
therefore it can be recovered in full.
Example
In the previous example given, the landlord would be able to enter the premises and carry out the
repairs to the walls required. It would be able to recover the cost of £8,000 from the tenant,
instead of the £1,000 damages it would have received through the courts
5.4 Summary
- 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.
5.4 Summary
- 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.
Example
A landlord lets a shop to a jewellers on a 10 year lease. It is a tenant-friendly letting market, and
until now the tenant has been a good tenant.
However, the current quarter’s rent is due, and the grace period of 14 days under the lease has
expired. The landlord is experiencing its own cash flow problems and needs the money urgently.
Debt action is not a good remedy
A debt action is not likely to yield results quickly enough. The threat of forfeiture might work, but
there is a risk of losing the tenant.
The landlord might choose to use CRAR, particularly as the tenant will have valuable goods that
can easily be seized to cover the rent (ie, jewellery).
Example
A landlord lets an industrial unit to a tenant on a 10 year lease, which has four years left to run.
One of the tenant’s employees backed a fork lift truck into the shuttered doors, causing damage
that will cost £3,000 to repair. There is negligible effect on the value of the landlord’s reversion.
Example
Neither forfeiture nor damages are likely to be a suitable remedy, given the possibility of the
tenant serving a counter-notice, and in the case of damages, that they would be negligible.
The landlord should rely on the Jervis v Harris clause to give notice to enter the premises and
carry out the work and recover the cost from the tenant as a debt.
Example
A landlord has let premises on a 10 year lease to a tenant, which is a newly formed company. The
obligations of the tenant are guaranteed by the director of the company, and the rent is secured
by a six month rent deposit. The tenant has missed this quarter’s rent. The landlord will likely dip into the rent deposit to cover the loss, and give the tenant notice to top up the balance of the deposit.
Example
If the tenant fails to do this, then the landlord may consider forfeiture or CRAR, but may also
consider calling upon the guarantor personally to settle the arrears.
6.4 Summary
- 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 section 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.
