Termination of Leases

Question 1

Effluxion of time

Answer 1

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, 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.

Question 2

Break clause

Answer 2

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. 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.

Question 3

Notice to quit

Answer 3

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:
Weekly – four weeks (residential) or one week (other tenancies)
Monthly – one month
Quarterly – one quarter
Yearly – six months
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 15^^th^^ day of each month to the 14^^th^^ day of the next month, then the notice period may end on either the 14^^th^^ or 15^^th^^.
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.
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.
Note that although the tenant of a protected periodic tenancy can hold over, it cannot serve a section 26 notice.

Question 4

Surrender

Answer 4

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.
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.
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.
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.

Question 5

Merger

Answer 5

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

Question 6

Damages

Answer 6

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.
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.

Question 7

Action in debt

Answer 7

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.
Again, the disadvantage is that court claims may be costly and time consuming.
However an advantage is that the time taken to pursue the debt gives the tenant breathing space, and strangely may therefore help preserve the landlord/tenant relationship.
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 element 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.

Question 8

Guarantor and rent deposit

Answer 8

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.
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.
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.

Question 9

Commercial rent arrears recovery (CRAR)

Answer 9

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

Question 10

CRAR requirements

Answer 10

As it is a self-help remedy, there are strict requirements to the way in which CRAR must be conducted:
* the landlord must appoint an 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)
* 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.

Question 11

Equitable remedies

Answer 11

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.

Question 12

The right to forfeiture

Answer 12

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’.
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.
Key word or definition: An ‘insolvency event’ usually covers 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.

Question 13

Why can forfeiture be an effective remedy?

Answer 13

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.
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.

Question 14

Waiver of the right of forfeiture

Answer 14

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.

Question 15

Type of breach

Answer 15

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 breaches
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

Question 16

Relief from forfeiture

Answer 16

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.
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 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.

Question 17

Breach of repair covenant

Answer 17

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.
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.

Question 18

Forfeiture for breach of repairing obligation

Answer 18

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 (LPRA38) applies to leases that meet the following criteria:
* 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 tip: Remember that you do not need to know the titles of statutes, but you do need to know what they do.

Question 19

Damages for breach of repairing obligation

Answer 19

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.
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, if at all. The landlord’s damages would be limited to £1,000.
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)

Question 20

So what does the landlord do?

Answer 20

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.
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.

Question 21

Choice of remedy – non-payment of rent

Answer 21

Debt action
· Advantages – reasonably simple, amount of debt is clear if rent has not been paid, can separate debt from ongoing landlord/tenant relationship
· Disadvantages – court action which is potentially costly and time consuming
· Use/limitations – any sum owed under the lease, whether principal rent or, eg, service charge
Commercial Rent Arrears Recovery (CRAR)
· Advantages – quick and efficient, no need to involve court
· Disadvantages – care must be taken to observe proper procedure
· Use/limitations – limited to principal rent, not other sums treated as rent
Forfeiture (specifically for non-payment of rent)
· Advantages – quick and efficient, no need to involve court. Threat of forfeiture might be sufficient.
· Disadvantages – risk that tenant will not comply and may lose tenant (whether this is a problem will depend on the market)
· Use/limitations – depending on the lease, may extend to other sums treated as rent

Question 22

Choice of remedy – repairing breaches

Answer 22

Damages
· Advantages – not many!
· Disadvantages – section 146 notice required, if lease qualifies, tenant may be able to serve counter-notice. Damages limited to reduction in value of landlord’s reversion.
· Use/limitations – if tenant serves counter-notice, the court will only give leave to continue in exceptional grounds (eg, repair is needed urgently)
Forfeiture
· Advantages – not many!
· Disadvantages – section 146 notice and counter-notice considerations similar as per damages
· Use/limitations – as per damages
Self-help (Jervis v Harris) clause
· Advantages – quick and efficient, no need to involve court. Landlord recovers full cost of repairs.
· Disadvantages – landlord must take care not to exceed powers (eg, carrying out repairs that go beyond the repairing obligation)
· Use/limitations – must be provided by the lease
Specific performance
· Advantages – may be only option
· Disadvantages – rarely granted unless exceptional circumstances (such as lease without forfeiture or self-help clause)
· Use/limitations – discretionary remedy – last resort

Question 23

Choice of remedy – all other breaches

Answer 23

Damages
· Advantages – may be helpful in separating issue whilst preserving landlord/tenant relationship
· Disadvantages – may be protracted and costly, no guarantee of recovering costs
· Use/limitations – any breach that can be compensated in financial terms
Forfeiture
· Advantages – may be effective in persuading tenant to comply with obligations
· Disadvantages – section 146 notice required, risk of losing tenant
· Use/limitations – probably not appropriate for minor breaches
Specific performance
· Advantages – not limited to financial, eg, obliged tenant to comply with obligation
· Disadvantages – discretionary remedy, difficulty to persuade court to grant it
· Use/limitations – cannot be used for continuing obligations (eg, an obligation to keep shop premises open each day)
Injunction
· Advantages – not limited to financial, ie, may stop tenant from proposed breach
· Disadvantages – discretionary remedy – difficult to persuade court to grant it
· Use/limitations – might be used for an intended breach of user clause, or an intended assignment or underletting

Question 24

Remedies involving security arrangements

Answer 24

Guarantor
· Advantages – guarantor may have better means to comply with obligations
· Disadvantages – may end up in certain instances with guarantor taking overriding lease and becoming tenant (may be a disadvantage or advantage depending on circumstances)
· Use/limitations – there must be a guarantor!
Former tenant
· Advantages – former tenant may be in better position to comply with obligations
· Disadvantages – as with guarantor
· Use/limitations – there must be a former tenant with an old lease or a new lease and authorised guarantee agreement
Rent deposit deed
· Advantages – quick and efficient. Can help ride over tenant cash flow problems
· Disadvantages – limited to certain number of months’ rent. Relies on tenant topping up rent deposit once used
· Use/limitations – generally only covers rent