Welcome to the first of our RED Alerts of 2023.
Featured in this month's update:
Hush Brasseries Ltd v RLUKREF Nominees (UK) One Ltd and another [2022] EWHC 3018 (Ch)
Summary
Hush Brasseries (the Claimant) had a lease of a commercial property and a separate option agreement which granted it a right to call for its landlord (the Defendants) to grant a new lease of the property when the existing lease came to an end. The Defendants terminated the option agreement when the Claimant fell into rent arrears under the lease. The Claimant made a successful application for relief from forfeiture to reinstate the option agreement.
The facts
The Claimant was granted a lease for a term of 25 years expiring in July 2024 by its former landlord. In 2011, the former landlord also granted the Claimant an option to call upon the landlord in the final year of the contractual term to grant it a new lease to commence on expiry of the existing lease.
In 2017, the property was transferred to the Defendants who planned to redevelop it. The Defendants thereby became the landlord of the property.
The option agreement contained a provision permitting termination if any of the events in the forfeiture clause of the Claimant's lease occurred. The two events of relevance to this case were:
- rent payable under the lease remains unpaid for 21 days after falling due
- failure to comply with a tenant obligation under the lease.
The Claimant accrued rent arrears throughout 2020 and 2021 as a result of financial difficulties caused by the Coronavirus pandemic. Consequently, the Defendants terminated the option agreement on the grounds referred to above. The Defendants did not forfeit the lease.
The parties entered into a settlement agreement in relation to the rent arrears and the Claimant duly repaid the arrears in accordance with that agreement.
Having repaid the arrears, the Claimant sought relief from forfeiture of the option agreement. In other words, it applied to Court to have the option agreement reinstated.
The parties agreed that two pre-conditions had to be satisfied for the Court to have jurisdiction to exercise its discretion to grant relief:
- by virtue of the option agreement (so, ignoring the Claimant's interest as a tenant under the lease), the Claimant must have a proprietary interest in the property
- the termination provision in the option agreement must secure the performance of the tenant covenants in the lease by the Claimant (in this case, to pay rent).
The decision
First pre-condition
The Judge held that the option agreement gave the Claimant a proprietary interest in the property. Contrary to the Defendants' position, that interest did not need to have any particular or special quality for the pre-condition to be satisfied.
Second pre-condition
The Judge was satisfied that the termination provision in the option agreement was intended to secure the performance of the tenant covenants under the lease. A termination provision will be in the nature of security where it takes effect when a primary obligation is breached, particularly where it operates indiscriminately. It is akin to a forfeiture clause in a lease, as was the case here.
This was the position even though, most notably:
- the lease had its own forfeiture clause for security so was not reliant upon the forfeiture clause in the option agreement to secure compliance with the tenant obligations
- the option was separate from the lease and they were capable of subsisting independently from each other.
The termination provision in the option agreement operated as additional security and that agreement and the lease could not be said to be wholly unrelated.
Relief
A Court will exercise its discretion to grant relief when, on the facts before it (which includes consideration of the respective parties' positions as a result of the forfeiture) it would be unconscionable for the non-defaulting party to rely on its contractual termination right.
The Judge granted the Claimant relief from forfeiture and the option was reinstated. The Judge commented that had the lease itself been forfeited, then the Claimant would have very likely been granted relief taking into account that all rent arrears had been paid.
It would be odd if relief would be granted for forfeiture of the lease but not the option agreement in circumstances where the termination provision in the latter secured performance of the tenant's obligations under the lease in the same way the forfeiture clause in the lease did.
Further, the Judge noted that the Defendants were in a position whereby, whatever the outcome of the application for relief, they had the benefit of the rental payments under the lease. With that in mind, it would be particularly unfair for the Claimant to be deprived of its contractual right to renew when it had paid up all the arrears. In essence, the Defendants would be in a position whereby they had exercised their security by terminating the option agreement but retained the benefit of the primary obligation (the payment of rent) that said security was intended to preserve.
The Judge also took into consideration that the Claimant had not wilfully breached the lease but rather had fallen into arrears as a result of the Coronavirus pandemic.
For the above reasons, it was unconscionable to enforce the landlord's right to terminate the option agreement.
Our comments
This case is a useful reminder of the applicable legal principles governing relief from forfeiture related to property agreements at a time when forfeiture is likely to arise more frequently as a result of the economic downturn.
It also helpfully analyses the authorities on relief from forfeiture - particularly the question of whether a proprietary interest must be of a certain type or quality for the Court to have capacity to grant relief.
It is a pertinent reminder that a forfeiture clause operates as security for the performance of primary obligations in a property agreement, most commonly payment of rents in a lease, and should not be assumed to be a strictly enforceable contractual termination right.
