Landlord and tenant — accepting surrender and waiving right to forfeit

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 three-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.