Waiver of the right to forfeit

The recent case of Faiz & Ors v Burnley Borough Council [2020] EWHC 407 (Ch) provides clarity on a tricky practical issue: when can a landlord accept monies after it gains knowledge of its right to forfeit?

The case concerned the purported forfeiture of a commercial lease. The Claimants brought an action for declaratory relief on the basis that the Council had waived its right to forfeit by demanding and accepting insurance rents and alleged that a sub-tenant, SASSF Ltd, was in occupation with statutory security of tenure based on a sub-lease dated 1 August 2017.

Background

On 26 February 2010 the Council had granted a lease of a café at the Old Stables of Towneley Hall, an historic country house, to the first and second Claimants (father & daughter). The contracted-out lease was for a term of 10 years, with insurance rents payable on demand and qualified alienation provisions in respect of the whole, and absolute covenants in respect of part, of the premises (“not to part with or share possession or occupation”).

The lessees appear to have traded through a series of companies which were owned or controlled by the first and second Claimants and/or other family members, referred to as the First Company, the Second Company and SASSF (the third Claimant). In 2011 the First Company had been prosecuted by the Council under the Food Hygiene (England) Regulations 2006.

On 16 October 2017 the Second Company went into liquidation. SASSF had already been formed on 1 August 2017. Between mid-October 2017 and mid-November 2017 SASSF made 15 payments to the Council in respect of rents.

In January 2018 the Council became aware of the liquidation of the Second Company and decided not to renew the lease. There was a meeting in May 2019 between the parties, but no mention of the sub-lease was made.

On 26 September 2019 the Council invoiced the lessees for insurance rent to the end of term (25.02.2020).

On 18 October 2019 the Claimants’ solicitors sent the Council a copy of the sub-lease and asserted that SASSF would have a subsisting right to occupy the Old Stables at the end of the lease.

On 30 October 2019 the Council served s.146 notices on the lessees on the ground that the sublease was a breach of the alienation provisions and incapable of remedy. The Council then submitted a revised invoice for insurance rents up to 18 October 2019. This invoice was paid in full on 11 November 2019.

The Council peaceably re-entered the Old Stables on 22 November 2019.

The Factual Matrix

Faiz was one of those cases where the underlying factual matrix could have given rise to a number of different legal outcomes. Indeed, HHJ Halliwell noted an alternative hypothesis – that the sub-tenancy took effect as an assignment of the lease following Parc Battersea Ltd v Hutchinson [1999] 2 EGLR 33 – but did not hear submissions on it.

The judge’s relevant findings of fact: –

• There was a lack of evidence on how the café business had passed from entity to entity.
• Without more, each company occupied as a licensee of the lessees.
• He did not accept that there had been an earlier sub-lease to the Second Company.
• It was unlikely that SASSF took over the business on the day it was incorporated.
• The parties to it entered into the sub-lease to try to acquire security of tenure for SASSF.
• The Claimants’ witnesses could not provide a convincing explanation why the sub-lease had been executed when the Second Company was trading from the Old Stables.
• It was likely that the sub-lease had been executed after May 2019 and back-dated to 1 August 2017.
• The Council’s knowledge as a regulatory authority did not impute it with knowledge as a landlord.
• Card payments by telephone which identified one of the companies as the account holder would not have been sufficient to give the Council knowledge that the companies were in occupation.

Principles of Waiver

It is well-established that a landlord waives its right of re-entry when, with full knowledge of the facts which give rise to that right, it acts in a way which is only consistent with the continuation of the lease (Matthews v Smallwood [1910] 1 Ch 777) and that such act must be communicated to the tenant (Cornilie v Saha & Ors (1996) 72 P&CR 147).

Once a landlord is aware of a potential breach, the onus is on it to make inquiries as to the precise nature of the breach (Metropolitan Properties Co Ltd v Cordery (1980) 39 P&CR 10).

Woodfall on Landlord & Tenant Vol I cites two authorities for the proposition that acceptance of rent falling due before the landlord’s knowledge of the breach does not waive the right to forfeit: Price v Worwood (1859) 4H&N 512 (though here the Court of Exchequer treated the tenant’s failure to insure as a continuing breach) and Osibanjo v Seahive Investments Ltd [2008] EWCA Civ 1282.

Osibanjo

In Osibanjo the landlords had presented a bankruptcy petition against one of the tenants for arrears of rent. The landlords subsequently became aware of breaches of alteration and user covenants. The tenant tendered a cheque for the arrears of rent and other sums due under the lease. The landlord encashed the cheque but only retained the monies needed to compromise the bankruptcy and returned the balance to the tenant monies expressly reserving the right to forfeit. The landlords subsequently brought proceedings to forfeit the lease. The tenant appealed (unsuccessfully), arguing that banking the cheque, pursuing the petition or accepting the sum due under the statutory demand amounted to waiver.

It was submitted by the Claimants in Faiz that Osibanjo was not clear authority for the proposition that a landlord cannot waive its right to forfeit by accepting rent which had accrued prior to the event giving rise to the right, as the two judges who gave judgments based their decisions on different reasoning. Rix LJ postulated that it was knowledge which founded the waiver and it should not matter whether the rent accrued due before that, but reached no conclusion.

The judge reviewed the authority, preferring Mummery LJ’s analysis. On this interpretation then: with knowledge of the breach, a landlord can accept monies which fell due prior to that date of knowledge. This is because the rent is accepted as payment of a pre-existing debt.

[Osibanjo usefully highlights that waiver is a matter of law not intention. The landlord must have accepted monies as rent and not, objectively, on some other basis.]

No Waiver in Faiz

The Claimants asserted there had been a waiver of the right to forfeit on any of three occasions: (i) by demanding rent after January 2018; (ii) by issuing the revised insurance demand on 4 November 2019; or (iii) by accepting payment of the insurance rent on 11 November 2019.

Applying the case law set out above, the first occasion was rejected as although the Council first had knowledge that SASSF was in occupation in January 2018, even if it had made inquiries it would have understood the company was a licensee. (While this was a breach of the alienation clause, it was not the breach relied upon in the s.146 notice). The Council were first made aware of the sub-letting by the solicitors’ letter of 18 October 2019.

The invoice dated 4 November 2019 did not amount to a fresh demand for insurance rent; it simply notified the lessees that their liability was less than the earlier invoice. Accordingly, the acceptance of these monies was in satisfaction of a pre-existing debt.

Conclusion

The case highlights the careful factual legal and factual analysis that can be required when a landlord is considering exercising its right of re-entry. Although s.82(2) of the Coronavirus Act 2020 implements a temporary alteration of the common law (a right of re-entry will only be waived by an express waiver in writing), no doubt once the 30 June 2020 passes[1], many landlords will need advice on forfeiture.

The case was also believed to be the first reported decision on the Capped Costs List Pilot. For a summary of this aspect of the case, please click here (you will need to have access to Practical Law).

Andy Creer
March 2020

[1] Or such other date if the ‘relevant period’ is extended.

This article first appeared in Practical Law.