Commercial Lease Forfeiture and Section 146 Notices: A Guide for Landlords

Your tenant breached your lease?

Did you, as the landlord, waive your right to forfeit the lease?

A landlord may sometimes find that a tenant has not complied with the terms of their lease. In certain situations, this can give the landlord the right to bring the lease to an end, which is known as forfeiture.

A breach can occur when either the landlord or tenant fails to comply with a promise set out in the lease. These promises are known as “covenants”, and they set out what each party must and must not do.

What is a Section 146 notice?

Where a landlord wants to forfeit a commercial lease for a breach other than non-payment of rent, they must usually first serve a notice under Section 146 of the Law of Property Act 1925. The notice is a statutory pre-condition to forfeiture, and forfeiting without serving a valid notice, where one is required, can leave the landlord’s action open to challenge.

To be valid, a Section 146 notice generally must specify the breach complained of; require the tenant to remedy the breach, if it is capable of remedy, within a reasonable time; and, where the landlord wants it, require the tenant to pay compensation for the breach. The tenant must then be given a reasonable opportunity to put matters right before the landlord takes further steps to forfeit.

A Section 146 notice is not required where forfeiture is based on rent arrears. Even after a notice has been served, a tenant may be able to apply to the court for relief from forfeiture, which, if granted, allows the lease to continue. Because the requirements are technical and a defective notice can undermine the whole process, landlords should take advice before serving one.

Is the Breach ‘once-and-for-all’ or continuing?

A ‘once-and-for-all’ breach is a breach of a lease covenant that occurs at a single point in time, whereas a continuing breach persists over time.

Once-and-for-all breaches include:

• Alienation clauses
• An insolvency event
• Breach to put premises in repair or carry out repairs by a specific date

Continuing breaches include:

• Breach of user covenant
• Breach to insure
• Breach of a covenant to keep in repair

Whether a breach can be remedied will depend on the type of covenant that has been broken. Some breaches are “continuing” in nature, meaning they must still be ongoing in order to be remedied. Others arise from a single action (or lack thereof) and can still be remedied after the event, for example where a tenant has carried out alterations or displayed signage without the landlord’s consent.

Beware of waiving your right to forfeit a lease

Once a landlord has knowledge of the tenant’s breach, they have to decide whether to forfeit the lease or treat the lease as continuing. If the landlord waives a ‘once-and-for-all’ breach, it will prevent them from forfeiting the lease based on that breach, should they change their mind in the future.

Therefore, it’s very important that once a landlord establishes that there’s a breach, they have a right to forfeiture, and if they intend to forfeit, any action taken must clearly demonstrate their intention to forfeit the lease. It is very important for a landlord to act if they are not consenting to a tenant’s breach.

Waiver of the right to forfeit vs waiver of a breach of covenant

A landlord may decide not to forfeit a lease for commercial reasons. In those circumstances, the landlord can often still pursue other remedies, such as a claim for damages for the tenant’s breach.

If a landlord waives the right to forfeit, they lose the ability to end the lease for that particular breach, but they may still be able to take another remedy, such as claiming damages. For that reason, landlords should be wary of waiving the right to forfeiture and potentially the ability to end the lease (subject to the tenant applying to court for relief), which ordinarily can only be ended through the statutory process.

The next practical steps if forfeiture is to proceed:

• The landlord needs to find out whether they have a legal right to forfeit the lease.
• It may be that the lease expressly includes a provision for forfeiture, avoiding the need for court proceedings, or, in the absence of an express provision, court action may be the only route.
• If forfeiture is for a non-rent-related breach, a Section 146 notice (under the Law of Property Act 1925) must be served; if forfeiture is on rent arrears grounds, no Section 146 notice is required.

Commercial forfeiture procedure is very different in key respects from forfeiture of residential leases, which may entail the need for permission from the First-tier Tribunal to proceed, and common law forfeiture procedure is not an option.

These areas of law are complex and give rise to potential pitfalls, and taking legal advice early is important.

If you are a commercial landlord dealing with a tenant’s breach and considering forfeiture or whether a Section 146 notice is needed, our commercial property and dispute resolution team can advise you on the right course of action. Contact us to discuss your situation.

Call us on 0161 667 3686 or fill out the form.