Commercial Property Focus - November 2009
Traps For Unwary Landlords On Forfeiture and Surrender
Disputes between residential landlords and
their tenants continue to reach the courts, even in the current
climate. In these legal battles, it is often not the intentions of
a landlord that comes under scrutiny, but the actions they take
against their tenants. Those landlords who are quick off the mark
and take decisive action against tenants who fall into arrears with
their rent or breach their contracts may actually find themselves
in trouble with the courts, as the two cases discussed below
demonstrate.
Surrender
A tenant may try to surrender his lease by
leaving the property with outstanding arrears, but a surrender is
only possible if it is accepted by the landlord. In Artworld
Financial Corporation v Safaryan, a tenant took a 3 year lease
of a luxury home beginning in September 2004 at a rent of £390,000
a year. In May 2006, the tenant moved out of the property because
of the landlord’s failure to carry out repairs to the central
heating and swimming pool. The landlord, through its solicitors
wrote to the tenant stating that it wouldn’t accept a surrender and
claimed £487,500 in unpaid rent for the remaining 15 months of the
term. The landlord then inspected the property and carried out
necessary repairs to the building and garden areas. Furniture and
furnishings were returned to the property that had been removed
before the lease. The landlord then put the property back on the
market for re-letting, but allowed members of his family to live
there until a new tenant was found.
In the Court of Appeal, the judge ruled that
the landlord had indeed accepted a surrender of the lease. Although
the judge said that the repairs, return of furniture and placing
the property back on the market for re-letting did not amount to
acceptance of a surrender- since they were actions consistent with
the landlord’s rights under the lease following default by the
tenant- the occupation of the house by members of the landlord’s
family was inconsistent with the continuance of the tenant’s lease
and so signified that the landlord had treated the lease as being
at an end.
This case provides a warning to landlords who
are keen to use their property whilst still trying to chase the
former tenant for rent arrears. Although landlords can enter the
property to carry out repairs and take other steps consistent with
the default, they cannot use the premises for their own benefit as
this amounts to acceptance of a surrender under the law.
Forfeiture
An important weapon in the landlord’s armoury
against tenants is the ability to forfeit i.e. to terminate a lease
if the tenant breaches any of their obligations under that lease.
However, landlords must be careful not to take any action that
accidentally ‘waives’ their right to forfeiture. In Osibanjo v
Seahive Investments, a tenant paid £10,000 by cheque to its
landlord, partly to discharge a bankruptcy petition and partly in
respect of rent arrears. The tenant had previously carried out
extensive building works to the property without the landlord’s
consent.
After banking the cheque, the landlord kept
the sum of £3,415 to discharge the bankruptcy petition and returned
the balance of £6,585 to the tenant for the rent arrears. The issue
was whether or not the landlord, by banking the cheque, had waived
its right to forfeit the lease for the tenant’s unauthorised works.
The landlord stated it was only retaining £3,415 to discharge the
bankruptcy debt and that presenting the cheque was not to be
regarded as waiving the landlord’s right to forfeit the lease. The
court agreed, deciding that it was impossible for the landlord to
avoid banking the cheque in order to separate out the two
payments.
Importantly however, without the bankruptcy
petition to discharge, the banking of the cheque would almost
certainly have resulted in a waiver of forfeiture rights for the
landlord. Only because the bankruptcy petition had to be discharged
did the court allow the landlord to bank the cheque at all.
Acceptance of rental cheques ‘without
prejudice’ or ‘under protest’ does not have the effect of
preserving landlords’ rights in relation to other breaches made by
tenants, and is likely to amount to a waiver in almost all cases.
The safest option for landlords wishing to forfeit is to return any
rental cheques received from tenants after a breach has
occurred.
As with lease surrenders, waiver of a
forfeiture right does not depend on the landlord’s intentions – it
is the conduct that is important. Acceptance of rent by a landlord
normally constitutes a waiver, since it is regarded as evidence of
the landlord’s intention to allow the lease to continue. These
cases highlight the dangers for landlords who act in a way that
recognises the continued existence of the lease where that is not
their desired intention. It makes no difference if their intentions
are communicated to the tenant, the court will consider the
landlord’s actions only.
David
Tabinor
Partner - Commercial
Property team
Weightmans
LLP
david.tabinor@weightmans.com