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After Freifeld, when might a tenant be refused relief from forfeiture?

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21st August 2015

In Freifeld v West Kensington Court Limited [2015] EWCA Civ 806, long-lessees had deliberately granted a future sub-lease of a commercial unit to a Chinese restaurant in breach of their alienation covenant not to sublet without landlord’s consent. An initial application for relief from forfeiture failed, because the tenants had wilfully breached their alienation covenant, and because there was an extensive history of neglectful management by the tenants of their obligations under the headlease. The judge concluded that the relationship between the tenants and their landlord had become dysfunctional and that it should not be re-imposed on the landlord by the grant of relief to the tenants.

During the days in which the Judge was handing down Judgment, but before any order had been drawn, the tenants procured a surrender of the future sub-lease from the Chinese restaurant and made another application for relief from forfeiture on the grounds that the damage had been rectified and that they should be given six months to sell their Head-Lease, for otherwise the landlord would receive a windfall of £1 million to £2 million. The Judge dismissed that application too, on the grounds that the tenants were “… simply reaping what they [had] sowed,” and that the head-lease was virtually valueless from the time that it was forfeit by service of the proceedings.

No challenge was mounted to the Judge’s findings of fact, including his findings as to the dysfunctional relationship between the landlord and the tenants. Nevertheless, the Court of Appeal concluded that the Judge had misdirected himself as to the principles applicable to the determination of applications for relief from forfeiture and, re-exercising afresh the discretion whether or not to grant relief, the tenants were, effectively, granted relief from forfeiture, albeit on terms that they must sell the head-lease within six months.

Arden LJ gave the leading judgment with which Ryder and Briggs LJJ agreed. She started, as did the Court of Appeal in Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224 earlier this year, with the proposition that the purpose of a reservation of a right of re-entry is to provide the landlord with security for the performance of the tenant’s covenants. The risk of forfeiture is not intended to operate as an additional penalty for breach. The wilfulness of the breach is certainly a relevant factor to be taken into account when deciding an application for relief, but the proportionality of the loss to the tenant (and the windfall to the landlord) when compared with the breach and the damage (if any) sustained to the landlord’s reversion must also be considered. The Judge had misdirected himself in not taking that proportionality argument properly into account. He had further misdirected himself in attributing virtually no value to the head-lease. Although the Head-lease had been forfeit by the service of proceedings, it would not be a virtually value-less asset if the Court granted relief from forfeiture for the purposes of a sale, which is what it was being asked to do. The Judge had therefore misdirected himself.

The Court of Appeal decided to exercise the discretion to determine the relief application afresh. The sub-lease had been surrendered, and the head-lease was potentially valuable. They were able to protect the landlord’s interests, without disproportionately penalising the tenants, by giving the tenants a period of 6 months within which to sell the head-lease; and requiring that a reputable managing agent be instructed to manage the property demised by head-lease during that 6 month period. If contacts for the sale of the head-lease were not exchanged within 6 months, then the Judge’s order dismissing the application for relief would come into effect.

After Freifeld, when might a tenant be refused relief from forfeiture? Each case must, of course, be decided on its own facts, but some conclusions can be drawn. The extent to which the tenant’s breaches were wilful will plainly be relevant, but will not be determinative. The same can be said for the value of the tenant’s interest; the more valuable the tenant’s interests, the more it can be said that forfeiture of that interest would be a disproportionate response to the breach. That element will therefore hold considerable sway where the leases concerned are 1954 Act protected leases, or (as in Freifeld) long-leases. Of most significance, however, will be the damage (if any) caused to the landlord’s reversion by the tenant’s behaviour and the extent to which such damage has been, or can be, remedied. In principle, most breaches can be remedied – alterations can be removed and the original configuration reinstated; unlawful sub-tenancies can be surrendered – and where the breaches have been remedied proportionality is likely to hold considerable sway. It is therefore in those cases where the damage caused is very considerable, or where the breaches cannot be remedied at all, that forfeiture, even of valuable leases, will remain a realistic outcome. The most common of such cases might, perhaps, be cases of unlawful subletting, ni which (unlike in Freifeld) a surrender of the unlawful sub-tenancy cannot be procured by the tenant in breach. In such a case, of course, forfeiture of the head-lease will cause the unlawful sub-tenancy to fall in; and it is probably in such circumstances that there is most chance of a tenant being refused relief from forfeiture.

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