Adam Bernstein hosts a monthly look at one of the legislative aspects that most affect your business, how it is run and how it can be more profitable. This month, Philippa Aldrich analyses the relationship between landlords and tenants.

All landlords naturally want to secure the highest return on their property investment.

As a result, most landlords are often keen to take advantage of any circumstances which would ensure they can obtain the highest rent possible - and that is something businesses need to be aware of.

Particularly as this may include a landlord exercising its right to terminate an existing lease where the tenant is paying a rent lower than that dictated by the local lettings market.

In that light, all tenants must protect their leasehold interests by ensuring the landlord’s right to terminate does not arise.

REASONS FOR TERMINATION

Although every lease is different, most contain provisions which will entitle the landlord to forfeit, or terminate the lease in three main instances. These include insolvency, non-payment of rent, or a breach of the tenant’s obligations.

METHODS OF TERMINATION

Where the lease affords the landlord the right to terminate, it may be brought to an end in one of two ways:

• Peaceable Re-Entry - a breach of covenant gives no right of re-entry unless the lease specifically provides for this.

However, if the lease does provide for such a situation, then the landlord is within his rights to enter and take the premises back, often by changing the locks.

It is important to remember that it is illegal for the landlord to enter the property while it is occupied and so this right is not available to the landlord unless the premises have been abandoned or entry is effected outside of normal working hours.

• Court Order to Recover Possession - this is the most common method employed by landlords.

The landlord applies to the courts for an Order for Possession of the premises.

It would be advised that you should immediately consult your solicitor in the event that you receive any indication of the landlord’s intention to obtain an Order for Possession.

THE PROCEDURES

In certain circumstances tenants do receive some protection:

• Breach of Lease Obligations (other than below) - If the breach is capable of remedy, then prior to proceeding with any forfeiture the landlord must first serve a statutory notice on the tenant which identifies the breach and requires the tenant to remedy that breach (where possible) as well as paying compensation.

If the tenant fails to take remedial action within a reasonable time period, the landlord may then take steps which could lead to forfeiture of the lease.

• Failure to Repair - In addition to the above, in the event of a failure to repair, where the lease term is not less than seven years, but provided there is more than three years left to run from the date of the service of a notice of dilapidations, the landlord’s notice must also inform a tenant of its legal right to serve a counter notice asserting the tenant’s statutory rights within 28 days.

After service of the counter notice, the landlord is prevented from taking proceedings for forfeiture or damages any further without having the permission of the courts.

• Failure to Pay Rent - The landlord must first serve a demand for rent before attempting to forfeit, unless:

(i) the lease expressly excludes this condition;

(ii) rent (or other periodic sums) are in arrears in excess of six months; or

(iii) goods available for seizure by bailiffs are not sufficient to satisfy any of the arrears.

A SAVING GRACE

It is not all bad news however. Even where a tenant is in direct breach of a lease obligation it may still escape with its lease intact in two main circumstances:

• Waiver - in this case, the landlord may lose its right to forfeit if, after the breach, it unequivocally recognises that the lease still exists.

This may be implied by an act of the landlord, as well as being expressly stated in any correspondence received by the tenant.

Examples where this may be implied include the service of a demand or acceptance of rent, exercising any rights contained within the lease or serving any notices provided for by the lease.

• Relief - a tenant has the option to apply to the courts for relief against forfeiture but only where the tenant is prepared to remedy the breach and compensate the landlord.

In cases of non-payment of rent, such relief is achievable if all of the arrears and the landlord’s costs are paid by the tenant.

However, in all other cases, relief is at the courts’ discretion.

If relief is granted then the lease can be reinstated.

MARKET MATTERS

The likelihood of the landlord seeking forfeiture depends largely on the local lettings market. If the landlord believes it can re-let the premises for a higher rent, especially at a time when there is not a pending rent review under the lease, it may seize any opportunity available to terminate the lease.

Philippa Aldrich is head of property at City law firm Fox Williams