16 January 2020
The Court of Appeal has confirmed that exercising statutory commercial rent arrears recovery (CRAR) rights will result in the waiver of any pre-existing rights of a landlord to forfeit a lease. The decision was widely expected and follows similar case law that preceded the introduction of CRAR. Nevertheless, the case provides a useful reminder to landlords to take suitable precautions to protect forfeiture rights before engaging with tenants that are in breach.
In 2013, Baljit Singh Brar and Jinder Brar (the Landlords) let commercial retail premises in Teddington to Sarvananthan Thirunavukkrasu (the Tenant) for a term ending in 2034. Rent was payable quarterly in advance on the usual quarter days and the lease contained a provision enabling the Landlord to forfeit the lease, in the event that the rent was unpaid 21 days after becoming payable.
The rent due on 25 December 2015 was not paid and on 18 January 2016, the Landlords instructed enforcement agents to exercise CRAR to recover the arrears. On 1 February 2016 the agents entered the premises and took control of the Tenant's goods, resulting in a payment by the Tenant to the Landlords' agents on 4 February 2016. Nevertheless, the Landlords purported to forfeit the lease on 12 February 2016. The Landlords received the payment from the Tenant on 17 February 2016.
Following the purported lease termination, the Tenant sued the Landlords for unlawful forfeiture of the lease.
CRAR is a relatively new remedy for landlords, which was originally enacted through the Tribunals, Courts and Enforcement Act 2007 (the Act) and brought into force in 2014. It replaced the ancient common law remedy of "distress", and essentially provides a statutory framework through which a landlord who is owed rent can seize and sell goods owned by the tenant, to make up for the arrears. Unlike distress, the process relies on a strict initial notice procedure, so in our experience it has not proved particularly popular. Nevertheless, exercising CRAR rights can send a powerful message to tenants who may be anxious to avoid reputational damage, even if their goods are not seized and sold.
When a right to forfeit a lease arises owing to a breach of the lease by the tenant, the landlord may elect to either act on that right and terminate the lease, or act on the basis that the lease is continuing, in which case the right will be irrevocably waived. The interpretation of the landlord's actions is therefore vital in assessing whether the right to forfeit the lease continues to exist. For example, if a tenant does not pay rent and a right to forfeit arises as a result, a landlord must not demand or accept rent before forfeiting the lease. This is because demanding or accepting rent would only be consistent with the lease continuing, which in turn would mean that the right to forfeit had been waived.
The appeal in this case principally concerned whether or not the exercise of CRAR would be considered to be an unequivocal acknowledgement of the continuation of the lease by the Landlords. If it was such an acknowledgement, the Landlords' decision to exercise CRAR would waive any pre-existing right to forfeit the lease and render the purported termination unlawful.
The Court of Appeal unanimously found in favour of the Tenant and ruled that the Landlords' actions amounted to a waiver of the right to forfeit the lease, meaning that the purported forfeiture was unlawful. The Court's reasons were as follows:
Forfeiture is often the most powerful remedy in a landlord's arsenal and it is for this reason that case law has developed to impose strict rules on landlords seeking to utilise it. Waiver of a right to forfeit can be inadvertent and we are frequently instructed on new matters where the right has already been lost. As this case demonstrates, interaction with a tenant can often result in waiver, even in circumstances where a landlord is simply seeking to exercise a legitimate remedy against a defaulting tenant. For this reason, landlords considering whether or not to forfeit a lease should seek immediate advice when the breach giving rise to the right occurs. Equally, tenants threatened with forfeiture should carefully review a landlord's prior conduct to assess whether the threat is credible.