Abolishing forfeiture of residential leases would be a popular reform. The government has promised to do it, but without saying when. Leasehold Specialist, Dona Awano, addresses the issues related to the forfeiture of leases in The Law Society’s Property in Practice Magazine.
Almost every residential lease includes a forfeiture clause. If the leaseholder is in breach of the lease, the landlord can end the lease, evict the owner, and occupy or resell the property. If the property was mortgaged, this also destroys the lender’s security. No other creditor can do this. Forfeiture creates a windfall available only to landlords.
Unless only rent arrears are involved, the process begins with a notice under section 146 of the Law of Property Act 1925, describing the breach of the lease and giving the leaseholder a chance to remedy it. If the notice is not complied with, the landlord can issue court proceedings seeking forfeiture. The court has the power to grant “relief against forfeiture”, a last chance for the leaseholder to put matters right, but failing that, the lease will end with the bailiff’s knock and the leaseholder out in the street.
Not all landlords pursue this process to the bitter end, but there seem to be a few ruthless landlords who would seize the chance of a windfall if the lease is eventually forfeited, and with the leaseholder paying all the landlord’s legal costs even if the attempt is unsuccessful.
Over time, there have been changes to the law of forfeiture, with procedural safeguards for leaseholders and limits to the kinds of breach that can lead to forfeiture, such as the following:
Abolition of “peaceable re-entry”
Originally, a landlord could forfeit a lease without going to court, simply by walking in and changing the locks. Section 2 of the Protection from Eviction Act 1977 put an end to that for residential dwellings. If anyone (not just the leaseholder) is lawfully residing in leasehold premises, the landlord cannot forfeit the lease without a possession order from the court. Attempting to do so is a criminal offence.
Small debts for a short period
Under Section 167 (1) of the Commonhold and Leasehold Reform Act 2002, a landlord cannot forfeit a residential lease for failure to pay rent, service charges or administration charges (or a combination of these) unless the total exceeds £350 and at least part of the debt has been overdue for three years.
Service and administration charges
Under section 81 of the Housing Act 1996, a landlord cannot forfeit a residential lease for failure to pay a service charge unless the leaseholder has admitted the amount or it has been determined by a court, a leasehold valuation tribunal or an arbitration tribunal.
Ground rent
Forfeiture for failing to pay ground rent does not need a section 146 notice or court or tribunal decision, but the “small debts” rule above still applies.
Formal demand for rent and the prescribed form
At common law, a landlord could forfeit a lease for non-payment of rent if a formal demand for it had been made. Most leases spell out that no demand is necessary and that failure to pay rent on the due date will allow a forfeiture. However, section 166 of the 2002 Act provides that rent will not even be due until the landlord has sent the leaseholder a formal demand containing prescribed information, so there can be no forfeiture before that is done.
Service charges ‘reserved as rent’
Some leases require the leaseholder to pay sums of money for insurance or service charges and describe them as “rent” to avoid the requirements of section 146. That loophole was closed by the Court of Appeal in Freeholders of 69 Marina v Oram [2011] EWCA Civ 1258, holding that a service charge is still a service charge even if the lease calls it rent, and that a section 146 notice is still needed before forfeiture for non-payment.
Prohibition of ground rents in new leases
Under the Leasehold Reform (Ground Rent) Act 2022, no ground rent can be payable under a lease granted after 29 June 2022. There can only be a “peppercorn” rent of no financial value. Earlier leases are not affected by this change.
Breaches of other covenants (non-monetary breaches)
Under section 168 of the 2002 Act, a landlord cannot serve a section 146 notice for a non-monetary breach of a long residential lease unless either the leaseholder has admitted the breach or a court or tribunal has determined that the breach has occurred.
Enfranchisement and lease extension of houses
If the leaseholder of a house (not a flat) has made a claim to buy the freeholder or extend the lease under the Leasehold Reform Act 1967, section 22(1)(b) of that Act requires permission from the court before forfeiture proceedings can be issued. Permission will not be granted unless the leaseholder’s claim was not made in good faith. Similar provisions apply to restrict forfeiture in proceedings that began before the claim to the freehold or an extended lease was made.
Collective enfranchisement and lease extension of Flats
Schedule 3 to the Leasehold Reform, Housing and Urban Development Act 1993 deals with collective enfranchisement and provides that a landlord needs permission from the court to start forfeiture proceedings against a leaseholder participating in an enfranchisement claim, and will not get permission unless the court is satisfied that participating in the claim is mainly a ploy to avoid forfeiture. If permission is given, then the leaseholder ceases to be a participating tenant.
A leaseholder cannot participate in an enfranchisement claim if already subject to a possession order, and needs the court’s permission to participate if forfeiture proceedings are pending.
Corresponding provisions in Schedule 12 to the 1993 Act apply to individual lease extensions.
Insolvency
Residential leases that allow forfeiture for the leaseholder’s insolvency have long been regarded as unmortgageable, and the UK Finance Handbook of lenders’ requirements confirms this.
No contracting out
Section 146 (12) prohibits contracting out of the requirements of s146, and any attempt to do so is ineffective.
Reforms and what is next for forfeiture
The Law Commission recommendation
The Termination Of Tenancies For Tenant Default (LAW COM No 303) October 2006 proposed the abolition of forfeiture and replacing it with a simple statutory scheme which would introduce a new concept called ‘tenant default’, intended to cover breaches of covenants or conditions in the lease by a tenant.
There is probably no reason for the government to revive this proposal, which was only a forfeiture by another name and by a simpler process.
Anticipated reform
In the King’s Speech on 17 July 2024 and the briefing notes, the government set out its commitment to “take steps to bring the feudal leasehold system to an end” by publishing a Draft Leasehold and Commonhold Reform Bill, which would, among other things, reinvigorate commonhold and remove the threat of forfeiture as a means of ensuring compliance with a lease agreement.
Commonhold
The government has made clear its intention to reinvigorate commonhold as the default tenure for residential dwellings and to phase out leasehold tenure.
Commonhold is an alternative form of freehold ownership without leases. Instead, the flat-owners (unit-holders) own the freeholds of their individual flats, and the building as a whole, including common parts, is held in commonhold tenure by a commonhold association whose members are the unit-holders. Management is governed by a commonhold community statement (“CCS”).
Because there are no leases, there can be no forfeiture. Unit-holders can freely transfer their freehold units regardless of arrears of service charges (“commonhold assessment”), reserve fund contributions or interest. Where money is concerned, the commonhold association’s rights are similar to those of an ordinary unsecured creditor.
How will arrears be dealt with under commonhold?
Where arrears exist, the association can register a charging order against the unit at the HM Land Registry, though not in priority to any existing charge or mortgage. It can also apply for an order for sale, like any mortgagee or beneficiary of a charging order.
In reality, the association will be out of pocket for a long time, even with a charging order, as no cash will be released until the unit is sold, and none even then if the unit is in negative equity. Essential maintenance and repair works may have to wait until the association can cover the shortfall with funds from other unit holders, or by borrowing, or until the outgoing unit-holder can be traced and sued for the money like any other debtor.
However, the association can require the new unit-holder to pay the arrears with interest, so in practice, a buyer is likely to require arrears to be cleared by the seller on or before completion.
Proposed abolition of forfeiture in the Leasehold and Freehold Reform Bill
When the Leasehold and Freehold Reform Bill was making its passage through parliament, Matthew Pennycook MP tabled a proposed new clause to abolish forfeiture for residential dwellings as follows:
“(1) This section applies to any right of forfeiture or re-entry in relation to a dwelling held on a long lease which arises either—
(a) under the terms of that lease; or
(b) under or in consequence of section 146(1) of the Law of Property Act 1925.
(2) The rights referred to in subsection (1) are abolished.
(3) In this section—
“dwelling” means a building or part of a building occupied or intended to be occupied as a separate dwelling, together with any yard, garden, or outhouses and appurtenances belonging to it or usually enjoyed with it;
“lease” means a lease at law or in equity and includes a sub-lease, but does not include a mortgage term;
“long lease” has the meaning given by sections 76 and 77 of the Commonhold and Leasehold Reform Act 2002.” —
This new clause would abolish the right of forfeiture in relation to residential long leases in instances where the leaseholder is in breach of covenant.
At the time, Matthew Pennycook MP stated:
“The reason for tabling the new clause is simple: forfeiture is a wholly disproportionate and horrifically draconian mechanism for ensuring compliance with a lease agreement, and it needs to be abolished through the Bill. To remind the Committee, the law of forfeiture gives the landlord the right, following a breach of a clause in the lease or an unpaid debt of £350, or a lesser sum if it has been outstanding for more than three years, to terminate the lease, regain possession of the property and pocket the unmerited windfall gain that would accrue from its sale”.
This clause did not make it into the Leasehold and Freehold Reform Act 2024, finally enacted last May.
Draft Leasehold and Commonhold Reform Bill
Since the King’s Speech last year, there has been much speculation in the Section about the likely contents of the long-awaited Leasehold and Commonhold Reform Bill.
Now that Matthew Pennycook MP is the Minister of State (Housing, Communities and Local Government), could this draft Bill be the final nail in the coffin for forfeiture of residential leases? We shall have to wait and see.
