New case shows landlords must tread carefully in forfeiting a lease

In a Court of Appeal case, Faiz v Burnley BC [2021] EWCA Civ 55, the Court considered forfeiture and principles relevant to waiver. It confirmed that a landlord could accept rent after they knew about a breach of a term, as long as the rent was accrued before the landlord was aware of the breach.

The Judgment provides useful insight into what parties must do to forfeit a lease and to prove waiver, and the degree of knowledge that a landlord must possess of the breach.

Key stages in the case

• 26 September 2019 – Landlord demands insurance rent for period 1 April 2019 – 25 March 2020

• 2 October 2019 – invoice sum due (Tenant does not pay)

• Early October 2019 – Tenant sub-lets premises

• 18 October 2019 – Landlord becomes aware of sub-let breach

• 30 October 2019 – Landlord serves s146 notice

• 4 November 2019 – Landlord sends Tenant another invoice for insurance rent with amended period 1 April 2019 – 18 October 2019

• 11 November 2019 – Tenant pays insurance rent

• 22 November 2019 – Landlord forfeits the lease by peaceably re-entering the premises

The facts

The Respondent, Burnley Borough Council (Landlord), had a commercial lease with the Appellants, Mr Mohammed Faiz and Ms Shakeela Faiz (Tenants), which was due to expire on 25 March 2020. The lease was contracted out of the Landlord and Tenant Act 1954.

The lease provided the following:

1. Payment of insurance rent within 7 days of demand;
2. Sub-letting was absolutely prohibited; and
3. In the event of a breach of a term, the Landlord had a right to forfeit the lease.

As set out in the above timeline, on 26 September 2019 the Landlord demanded insurance rent for the period 1 April 2019 – 25 March 2020 (up until the lease was due to expire). The invoiced amount was due on 2 October 2019, which was subsequently not paid by the Tenants.

In early October 2019, the Tenants sub-let the premises in breach of the term in the lease. The Landlord became aware of the sub-letting (the breach) on 18 October 2019 and consequently served a section 146 notice under the Law of Property Act 1925 to indicate an intention to forfeit the lease.

On 4 November 2019, the Landlord sent another invoice for insurance rent, but amended the period of the accrued rent to be between 1 April 2019 and 18 October 2019, recalculating the amount due accordingly. The Tenants paid the insurance rent on 11 November 2019 and on 22 November 2019, the Landlord peaceably re-entered the premises thus forfeiting the lease.

Decision

The Tenants argued that the Landlord had waived its right to forfeit the lease through demand and/or acceptance of rent, thus making the Landlord’s re-entry unlawful. The Tenants did not discharge their burden of proof and the Court of Appeal dismissed their appeal.

First dealing with the issue of forfeiture, the Court established that the right to forfeit a lease arises where there is a lease in place with a relevant term; there is a forfeiture clause in the lease; and there has been a breach of the relevant term. The Landlord satisfied these points and therefore they had the right to forfeit the lease.

Regarding the waiver of forfeiture, generally, a landlord demanding rent with knowledge of the breach would amount to a waiver of the right to forfeit. Furthermore, if the landlord were to accept accrued rent that was due after the date the landlord had knowledge of the breach, this would also amount to a waiver.

However, in this case, because the accrued rent was due before the Landlord knew about the breach, the Court said it was possible for a landlord to accept rent after becoming aware of the breach. The Landlord demanded the insurance rent before they had knowledge of the breach (i.e. on 26 September 2019), so this did not amount to a waiver.

The later, revised invoice also did not amount to a waiver because it was not a new demand. The Landlord only demanded the accrued rent up until the date that they became aware of the breach (18 October 2019).

The Court also gave guidance on a landlord’s knowledge. It said that for a waiver to take place, in the case of an unlawful sub-letting as is the case here, the landlord must know that the sub-letting has occurred and the rent demanded or accepted by the landlord must be due after the date of the breach.

Key points to take away

Landlords need to be careful when demanding or accepting rent when they become aware of a breach of a term.

If a landlord wants to forfeit as a result of a breach (and they have the right to forfeit as is provided for in their lease) and there is rent due, they should not demand or accept rent accruing beyond the date they become aware of the breach, as this would likely amount to a waiver.