Lease Forfeiture: The Pros and Cons

Commercial lease forfeiture

What is forfeiture?

Commercial forfeiture, or ‘re-entry’, is where a landlord has the right to terminate a lease and regain access to the premises if the tenant is in breach, for example through using the property for a purpose that is not allowed, insolvency or rent arrears.

Landlords are advised to include an express forfeiture clause in the lease, which can be enforceable by peaceful entry or court proceedings. The landlord must generally let the tenant know of their intention to forfeit, by serving a notice under s.146 Law of Property Act 1925.

Tenants and mortgagees may be able to claim relief from forfeiture, allowing the lease to be reinstated.

What happens after a tenant moves out?

Landlords are automatically “bailiees” of any goods left in the property. They cannot purposely or recklessly damage them and must serve a statutory notice to the tenants so they can retrieve their possessions. It is advisable to prepare an inventory of goods left in the property.

The reason why tenants leave their belongings in the premises can differ from case to case, but often the items are simply too big to move. As a result, the landlord may incur storage costs which cannot be recovered from the tenant. Unless it can be established that the former tenant has abandoned them, the landlord cannot sell the goods.

There is a risk that squatters may move into the vacant premises, so the landlord you may have to incur costs for installing additional security measures. A landlord is also liable to pay the insurance, business rates and utilities. If the unit is part of a larger building, there will also be reduced contributions to the service charge fund. A landlord should check whether they are eligible for certain exemptions such as empty rates relief. Usually, shops and offices are eligible for 100% relief for three months and warehouses are eligible for 100% for six months.

If registered or noted at the Land Registry, the landlord must close the leasehold title and remove any associated notices or entries relating to the lease.

Re-letting the premises

Before re-letting, the landlord should advise potential new tenants of a previous tenant or mortgagee’s potential claim for relief (although this may discourage them from letting) in case they seek to make a claim. A landlord may ask the court for a declaration allowing them to re-let without relief. Without this, there is a risk that a former tenant or mortgagee successfully applied for relief.

Considerations:

Hanna Smith, Associate Solicitor for our Specialist Property team, advises: “The decision to forfeit should not be taken lightly. There are several factors to consider, such as the current state of the property market and whether or not the premises can be re-let quickly. A tenant may be able to claim relief (to reinstate the lease) and landlords must ensure that they do not inadvertently waive the right to forfeit, for example by accepting and demanding rent. Landlords should seek specialist advice regarding the legal and practical issues which may arise if they intend to forfeit a lease.”

Are you dealing with the forfeiture of a commercial lease? We highly recommend seeking legal advice from our Specialist and Commercial Property team

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