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Saving the bank’s security after it is too late…

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21st April 2016

It is a requirement of the court rules that when a landlord seeks to forfeit a residential lease by issuing a claim in court, that claim must be served on a mortgagee. The purpose of this provision is to make sure that the bank is able to apply for relief from forfeiture (and hence reinstate its security) before it is too late. But what happens if the bank is served with the claim, the tenant and the bank do not attend the hearing, the lease is forfeited and the possession order subsequently enforced with the result that title is closed and the bank loses its security?

With long residential leases, the most common ground for forfeiture is likely to be the non payment of service charges, which requires a s.146 notice to be served and hence once the possession order (made by the court) has been enforced, the court cannot grant relief and reinstate the Bank’s security.

So what can a bank do that in that situation?

In order for a bank to be able to apply for relief it must set aside the possession order. The court has set down the test to be applied as to whether a court will exercise its discretion to set aside the possession order when a tenant did not attend the hearing. It seems that the same principles should apply to a bank but its position is different from a tenant: It will lose its security but not its entitlement to the money owed by the tenant. Thus the exercise of court’s discretion will be different in respect of the tenant and a bank. This was reflected in Rexhaven Ltd v Nurse and Alliance & Leicester BS [1996] 28 HLR 241 where the judge refused to set aside the possession order and reinstate the bank’s security because the bank had not attended the hearing through its own fault, notwithstanding that it lost valuable security due to the failure of the tenant to pay service charges.

But it is a balancing exercise: The court must weigh up the failure of the bank to intervene against its loss of security and the likelihood that relief will be granted if the possession order is set aside. And whether the landlord should obtain a windfall as to relief being granted that is sufficient to remedy the breach and compensate the landlord.

Although Rexhaven seems to suggest that a court should ordinarily refuse to set aside a possession order and grant a bank relief from forfeiture, the Court of Appeal have recently granted relief from forfeiture to a tenant whose breach was wilful and serious on the basis that the tenant had six months to assign the lease. So it seems that the court’s attitude to relief and setting aside a possession order may have moved on subsequently since Rexhaven.

The above should highlight to banks that they should make sure that they have systems in place so that a claim for forfeiture or a resulting possession order is not left until it is too late rather than having to rely on the discretion of a court.

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