A threefold lesson on forfeiture

United Kingdom

A recent case has highlighted the courts’ current thinking on three aspects of the law surrounding the forfeiture of a lease.

The Court of Appeal concluded that:

If a tenant has expressed to which arrears payments made by him should be allocated and the landlord accepts those payments, it is to those arrears which the sums must be allocated, regardless of a landlord’s stated intention to do otherwise

If a CVA specifies the payments to be made in lieu of rent a landlord cannot forfeit for a failure to pay those payments as they are no longer payments of rent

If a tenant applies for relief to get back the lease, it need only pay the arrears on which the forfeiture was based - likely to be only the most recent missed rental payment

To avoid the potential pitfalls highlighted by this case landlords who wish to preserve their right to forfeit should obtain advice on not accepting or immediately returning payments received from a tenant which are expressly for the arrears on which the forfeiture is to be based.

Further, landlords need to be aware of the extent to which a CVA could limit its remedies against an insolvent tenant and where appropriate challenge its terms.

Finally, landlords should not assume they will recover all outstanding arrears where it has forfeited a lease and the tenant has applied to get it back. The conditions imposed on a tenant by a court granting such an order could be relatively minimal.

Under the lease in question rent plus VAT was payable on the first of each month. The tenant company’s agent was instructed to prepare a CVA. He wrote to the landlord specifying certain payments which would be made towards the December rent, but stated the outstanding November rent and certain outstanding VAT payments would have to be claimed under the CVA as an unsecured debt.

The landlord demanded the December rent in the usual way and made it clear to the tenant’s agent that he did not accept the allocation of payments described above but would be accepting any payment on the basis it was for the November rent. In the ensuing conversations both stuck to their respective positions. The payments were then made and retained by the landlord.

The landlord subsequently demanded the January rent and the tenant paid it in weekly instalments, which again were retained by the landlord.

The landlord then issued forfeiture proceedings in February on the basis of the non-payment of one month’s rent and also claimed the outstanding VAT payments.

The appeal court found that as the tenant was entitled to allocate its payments at its discretion, it had paid its December and January Rent and the only payments outstanding were the November rent and the VAT payments. By accepting these payments the landlord had waived its right to forfeit for the outstanding November rent.

The court went on to find that assuming the landlord had not waived its right to forfeit, the CVA governed the payments to be made to the landlord. Therefore the landlord could not forfeit the lease as no rent was owing - it had been substituted by payments under the CVA.

Finally the court found that even if the landlord had been entitled to forfeit, to get the lease back, the tenant needed only to pay those arrears on which the forfeiture was based. Therefore had the landlord been able to forfeit for the January rent, it was only this rent which the tenant would have had to pay and not the outstanding VAT arrears.

Law: Thomas -v- Ken Thomas Ltd