Lease termination

Question 1

Methods of termination of leases

Answer 1

1. Effluxion of time:
   the lease ends at the end of the contractual term.
   Note: protected tenant will be able to hold over after the end of contractual term
2. Break Clause:
   can end the tenancy but requires positive action by a party to end the lease
3. Notice to quit
   For a periodic tenancy - means either the landlord or tenant giving notice that they intend the tenancy to end
4. Surrender
   Means that the tenant gives up its leasehold interest to the landlord (with the landlord’s agreement).
5. Merger
   Means either the tenant acquires the landlord’s interest or a third party acquires both interests. Either way, the freehold (or superior interest) and the leasehold are merged and come to and end.

Question 2

Effluxion of time

Answer 2

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.

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 - may be converted to a periodic tenancy.

Question 3

Break Clause

Answer 3

Break clause will allow a lease to be ended before the contractual term.

If the tenant exercises a break, then it is effective with a protected tenancy.

However, if the landlord exercises a break it only operates to bring the contractual term to an end. Tenant may still hold over.

Therefore if a landlord’s break clause is to be effective, a lease that would otherwise be protected must be contracted out.

Question 4

Notice to quit

Answer 4

Periodic tenancy cannot be contracted out.

Unless there is a tenancy agreement that specifies otherwise, the notice period required depends on the period of tenancy.

Weekly: residential (4 weeks), other 1 week
Monthly: 1 month
Quarterly: 1 quarter
Yearly: 6 months

A notice to quit gives the other party a specific date on which to vacate which must expire on the first or last day of the tenancy period.

E.g. 15th-14th: notice period may either end on 14th or 15th.

Question 5

Notice to quit and security of tenure

Answer 5

Protected tenancy: landlord may still serve a notice to quit which will end the periodic tenancy but the tenant is still entitled to hold over.

Therefore landlord needs to serve hostile s25 notice supported by one or more of the statutory grounds.

Note: although protected periodic tenancies can hold over they are not entitled to serve a s26 notice.

Question 6

Surrender

Answer 6

A fixed term tenancy may be brought to an end earlier than the end of the contractual term provided both landlord and tenant agree.

Tenant gives up its leasehold interest to the landlord. An express surrender must be made by deed.

A premium may be payable for the surrender, but the direction will likely depend who has the most to gain. A premium paid by a tenant to give up its interest is known as a reverse premium.

Question 7

Different forms of surrender

Answer 7

Surrender by operation of law:
- arises when the landlord and tenant act in a way that is inconsistent with the continuation of the tenancy (e.g. the landlord accepts keys from the tenant with an understanding that the tenant is leaving the premises permanently)

Express surrender by deed:
express agreement: sometimes there will be an agreement to surrender in advance of the seed

Question 8

Landlord’s remedies for breaches of the lease

Answer 8

• damages
• action in debt
• guarantor
• rent deposit
• commercial rent arrears recovery (CRAR)
• Equitable remedies

Question 9

Damages

Answer 9

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.

Measure of damages: to put the landlord back into the position they would have been were it not for the breach of covenant

BUT court proceedings can be costly and protracted and the landlord may not be able to recover its costs

Question 10

Action in debt

Answer 10

• A landlord can issue court proceedings to recover debt such as unpaid rent, service charge or insurance rent
• Debt is limited to rent due in the six years before the issue of proceedings (rare in commercial but maybe relevant for long leases and ground rent)
• disadvantage is court claims can be lengthly and time consuming but usually the time gives the tenant breathing space
• may also pursue former tenant for debt if old lease or an AGA

Question 11

Guarantor

Answer 11

The landlord can rely on the contractual terms of a guarantee to claim its losses from the guarantor.

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.

Question 12

Rent deposit

Answer 12

The landlord can draw on a rent deposit (usually limited to six months’ rent) if there are arrears.

Tenant will be required to top up the deposit after a withdrawal. If the breach is an isolated incident it can provide a useful cushion.

Question 13

Commercial rent arrears recovery (CRAR)

Answer 13

CRAR: self-help remedy

may be used where:
- premises are purely commercial

• minimum of seven days’ principal rent is owed (includes VAT and interest)
• lease has not been forfeited

Note: cannot be used to recover service charge or other sum reserved as rent

Question 14

CRAR process

Answer 14

• landlord MUST appoint an enforcement agent who either has the required certificate from the court or is exempt from the requirement
• Seven clear days’ notice must be given of the intention to enter the tenant’s premises
• notice must include certain details such as the amount of debt and how to repay it, details of the power being used to enforce the debt and contact details for enforcement agent
• if 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 seized goods

Question 15

Equitable remedies

Answer 15

Specific performance:
- an order to the tenant to do something that it has not done
- rarely available to a tenant particularly for a breach of repair
- specific performance has been granted or a tenant to put premises in repair, but this was an exceptional case

Injunction:
- an order to the tenant not to do something
- landlord may be able to get an injunction if aware that the tenant intends to assign the lease unlawfully
- however, unlikely to get an injunction against something that has already taken place

Question 16

What is forfeiture

Answer 16

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 contractural term (or during holding over).

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.

Question 17

Right to forfeiture

Answer 17

Only permitted insofar as the lease provides for forfeiture.

A commercial lease will typically allow a landlord to forfeit if the tenant fails to pay rent (after a period of grace), breaches its obligations under the lease or there is an ‘insolvency event’

Question 18

Forfeiture: when can the landlord forfeit?

Answer 18

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 (LPA 1925).

Question 19

What is a section 146 notice

Answer 19

A notice that details the alleged breach and gives the tenant a reasonable opportunity to remedy it, failing which the landlord will be entitled to forfeit.

Question 20

Why can forfeiture be effective?

Answer 20

• can cause embarrassment to a tenant’s business. Typically, the landlord will arrange for a bailiff to attend the premises in the early morning, 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 damage to their business’s reputation by settling the debt and regaining access to the premises

Question 21

How is forfeiture achieved?

Answer 21

1. Peaceable re-entry:
   - simply instructing the bailiff
   - risk that tenant may legally challenge this if it has not been carries out lawfully or if the tenant’s stock, equipment or belongings are lost, damaged or stolen
2. Apply to court
   - costs more and takes longer
   - makes it more difficult for the tenant to challenge

Question 22

Waiver of the right to forfeiture

Answer 22

If the landlord acts in a way that acknowledges the continuing existence of the lease, the landlord risks losing the right of forfeiture

Implied waiver can arise if:
- landlord does some unequivocal act recognising the continuing existence of the lease
- with knowledge of the breach in question
- communicates that act to the tenant

Intention of the landlord is irrelevant

Question 23

Continuing breach

Answer 23

Meaning each day the breach continues the landlord regains the right to forfeiture.

Examples:
- failure to keep the premises in repair
- breach of the user covenant
- failure to comply with an insurance obligation

Question 23

Once and for all breach

Answer 23

If the landlord waives the right to forfeiture it will never be able to regain it for that breach

Examples:
- non-payment of rent
- an unlawful assignment or underletting
- an insolvency event

Question 24

Relief from forfeiture

Answer 24

The tenant is able to apply for relief from forfeiture as soon as the landlord serves a section 146 notice or starts process of forfeiture.

Relief from forfeiture is a discretionary remedy. If the court awards the tenant relief from forfeiture then the lease is restored as fi forfeiture had never taken place.

Note: if the forfeiture is for non-payment of rent the tenant will normally be able to get relief from forfeiture by settling all rent arrears and the landlord’s costs.

Other parties such as mortgagee or undertenant are also able to seek relief from forfeiture.

For undertenant this may mean they become the direct tenant of the landlord.

Question 25

Forfeiture for breach of repairing obligation

Answer 25

Landlord must serve a section 146 notice of intention to forfeit detailing remedy and giving the tenant reasonable time to remedy the lease (as with other tenant breaches apart from non-payment of rent).

There are extra requirements for leases to which the Leasehold Property Repairs Act 1938 applies

Question 26

Leasehold Property Repairs Act 1938

Answer 26

• Lease is for a term of 7 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 counter notice. This means that the landlord must get leave before proceeding (and this is not easy)

Landlord must advise the tenant of these rights in the section 146 notice.

Question 27

Damages for breach of repairing obligation

Answer 27

A landlord cannot issue proceedings for damages for a repairing obligation until it has served a section 146 notice. Tenant then has 28 days to serve a counter-notice.

Measure of damages is loss of value to the landlord’s revision not the cost of repair

Question 28

Best option: Send-help clause/ Jervis v Harris clause

Answer 28

Gives the landlord the right to:
- enter the property
- carry out any repairs
- recover the cost of doing so from the tenant

No need to serve 146 notice or counter notice.

Cost of the repairs is considered a debt owed to the landlord and can be recovered in full.

Question 29

Remedies: non-payment of rent

Answer 29

1. Debt action

Advantages:
- reasonably simple, debt is clear is rent has been paid
Disadvantages:
- court action
- potentially costly
Use/limitations:
- any sum owned under the lease, principle rent or service charge etc.

2. Commercial rent arrears recovery
   Adv:
   - quick and efficient
   - no need to involve court
   Dis:
   - procedure is complicated
   - principal rent only
   Use:
   - principal rent only
3. Forfeiture:
   Adv:
   - quick and efficient
   - can avoid court sometimes
   Dis:
   - risk tenant will not comply
   - lose tenant
   Use:
   - depends on the lease
   - may extend to other sums treated as principal rent

Question 30

Remedies: repairing breaches

Answer 30

1. Damages
   Adv:
   - none
   Disav:
   - s146 notice required
   - may be able to serve counter-notice
   Use:
   - if serves counter-notice court will only give leave on exceptional grounds
2. Forfeiture
   Adv:
   not many
   Disav:
   – s146 notice required
   - may be able to serve counter-notice
   Use:
   - if serves counter-notice court will only give leave on exceptional grounds
3. Self-help
   Adv:
   - quick
   - efficient
   - no court involvement
   - recovers full cost of repairs
   Disadv:
   - must take care not to exceed power
   use:
   - must be provided for in the lease
4. Specific performance
   Adv:
   - may be only option
   Dis:
   - rarely granted unless exceptional circumstances
   Use:
   - discretionary remedy - last resort

Question 31

Choice of remedy - all other breaches

Answer 31

1. Damages
   Adv:
   - may be helpful in separating issue whilst preserving landlord/tenant relationship
   Dis:
   - may be protracted and costly
   - no guarantee of recovering costs
   Use:
   - any breach that can be compensated in financial terms
2. Forfeiture
   Adv:
   - may be effective in persuading tenant to comply with obligations
   Dis:
   - section 146 notice required
   - risk of losing tenant
   Use:
   - not appropriate for minor breaches
3. Specific performance:
   Adv:
   - not limited to financial
   Dis:
   - Discretionary remedy, difficult to persuade the court to grant it
   Use:
   - cannot be used for continuing obligations
4. Injunction:
   Adv:
   - not limited to financial
   Dis:
   - discretionary, difficult to obtain
   Use:
   - might be used for an intended breach of user clause or an intended assignment of underletting

Question 32

Remedies involving security arrangements

Answer 32

1. Guarantor
   Adv:
   - may have better means to comply with obligation
   Dis:
   - may end up with guarantor taking overriding lease and becoming tenant
   Use:
   - need to require a guarantor
2. Former tenant
   Adv:
   - may be in better position to comply with obligations
   Dis:
   - limited to certain number of months rent
   - relied on tenant topping up rent deposit once used
   Use:
   rent only