While entering into a commercial lease is a popular way of securing a tenant for your business premises, you may encounter problems, such as your commercial tenant stopping rent payments. In this case, the commercial forfeiture of the lease may be the answer you’ve been looking for. But what does it mean, and what is involved in the procedure?
In this post, we’ll outline what commercial forfeiture is, considerations you must take, and common alternatives, ensuring you can make an informed decision before taking action against your tenant.
What Is the Commercial Forfeiture of a Lease?
Commercial forfeiture of a lease is a legal process through which a commercial landlord can terminate a lease due to a tenant breaching its leasehold covenants (contractual terms/promises to the landlord). The most common trigger for forfeiture is tenants missing rent payments and falling into rent arrears.
What Are the Grounds for Lease Forfeiture?
A commercial landlord has the right to forfeit a lease when a tenant breaches their covenants within the lease. Breaches could include:
Non-payment of rent: The most common ground for lease forfeiture is when a tenant fails to pay rent on time or at all, breaching the lease agreement terms and accruing rent arrears.
Breach of covenants: The tenant breaches specific covenants, such as failing to maintain the property in the manner required by the lease, or failing to comply with insurance obligations.
Subletting without permission: The tenant sublets the property to someone else without the landlord’s approval.
Illegal activities: The tenant undertakes illegal activities on the premises.
Unauthorised adjustments: The tenant damages or makes significant alterations to the property without the landlord’s consent.
Commercial Forfeiture of a Lease: Methods
There are two methods of undertaking commercial forfeiture of a lease.
- Peaceable Re-Entry
The landlord has the legal right to peaceably re-enter the property if the tenant fails to rectify the breach in the stated time. This means taking back possession of the property by physically entering it and changing the door locks.
This process can be conducted without court proceedings, making it an attractive option to commercial landlords who want to save both time and money.
However, there are hidden dangers which need to be considered, and landlords can easily find themselves in hot water if a tenant can demonstrate that the landlord had no right to re-enter and/or that the landlord failed to comply with the relevant legal requirements in re-entering.
It is, therefore, vitally important that landlords seek specialist advice before undertaking this process, in order to avoid potential damages claims for trespass, and/or claims for losses suffered by the tenant as a result of the eviction (which, in the case of commercial premises, can obviously be significant).
- Court Proceedings
The alternative to peaceable re-entry is undergoing court proceedings. This legal method enables landlords to formally reclaim possession of their property when a tenant breaches the covenants within the lease.
It involves making a court application and allowing the Court to judge whether the landlord has the right to forfeit the lease.
While it can be a lengthier and more complex process than peaceable re-entry, it is valuable if the tenant contests the landlord’s right to forfeit.
But remember, court proceedings don’t always guarantee the landlord a favourable outcome; the tenant might counterclaim for disrepair or breach of landlord covenant, and the court might even grant the tenant a remedy known as relief from forfeiture.
What Is Relief from Forfeiture?
Relief from forfeiture allows tenants to apply to the Court to have the lease reinstated after it has been terminated. This can typically happen if the tenant rectifies the breach and complies with all the conditions laid out by the Court. If they have faced previous financial difficulties, they may engage with business debt recovery specialists in an effort to start making payments again.
The objective of relief from forfeiture is to offer tenants a second chance to continue occupying and trading from the property while ensuring that landlords are adequately compensated for the breach.
It is worth remembering that the court has the discretion to grant or withhold the relief, but the court will generally exercise its discretion in favour of the tenant if the tenant has acted quickly in remedying any breaches and paid the landlord’s costs.
Considerations Before Going Ahead With Commercial Forfeiture
The commercial forfeiture of a lease is not a decision you should take lightly. Before continuing, we strongly recommend you speak to a legal professional about your options and consider the following:
Legal Compliance
Before proceeding with forfeiture, you must ensure you are lawfully allowed to do so. The right must be communicated properly through a forfeiture clause, which could require the commercial landlord to give the tenant notice.
For a commercial lease forfeiture notice to be legitimate, it is required to:
- Identify the specific breach;
- Instruct the tenant to rectify the breach (if possible);
- Demand monetary compensation from the tenant for the breach; and
- Allow the tenant a reasonable period to rectify the breach.
Furthermore, you need to be careful not to inadvertently waive the right to forfeit by accepting rent or acknowledging the continuation of the lease following the breach.
Financial Implications
Landlords should always assess the financial implications of forfeiture, including the potential loss of rental income during a long vacancy period and costs associated with re-letting and court fees. It would be wise to evaluate the current market conditions to scope the ease of finding a new suitable tenant.
Reputation and Relationships
Remember, forfeiture can be perceived negatively, potentially impacting your reputation as a landlord. This may also affect your relationships with current and future tenants. Before being hasty with commercial forfeiture, we recommend assessing the tenant’s financial position and ability to rectify the breach, which could influence whether you pursue forfeiture or another method. You can learn more about the alternatives to commercial forfeiture of a lease below.
Alternatives to Commercial Forfeiture
Assess all your options before choosing forfeiture. Being informed can help you make the most suitable decision. Some further options include:
- Statutory Demand – if the requested payment is not made in three weeks, you may be able to petition for your tenant’s insolvency.
- Commercial Rent Arrears Recovery – instructing enforcement agents to collect overdue rent from tenants by seizing and selling assets.
- Lease restructuring – change the lease terms by offering more favourable terms to the tenant, such as temporary rent reductions or different payment schedules. This may enable the tenant to survive their financial difficulties while ensuring long-term occupancy.
- Rent deposit drawdown – use the tenant’s deposit to cover overdue rent.
- Guarantor pursual – pursue the tenant’s guarantor for rent arrears in an effort to cover the missed payments.
- Rent insurance claims – file a claim to recover unpaid rent through rent guarantee insurance.
- Mediation or arbitration – reach a mutually agreeable solution to disputes while avoiding court proceedings.
Seeking Advice on the Commercial Forfeiture of Your Lease?
If you’re seeking guidance on undertaking commercial forfeiture or an alternative, our team of solicitors is here to help. Our breadth of experience in commercial property law enables us to always protect the best interests of our clients throughout each step of the legal process.
Please get in touch today to discuss your requirements, or check out our blog for more valuable insights. We can also offer business legal services surrounding property development, commercial finance, break clauses, and more.