Commercial lease forfeiture explained: when can a landlord forfeit a lease?

Forfeiture of a commercial lease is one of the most powerful remedies available to a landlord when a tenant breaches the terms of its lease. Whether the breach relates to unpaid rent, unauthorised alterations, unlawful subletting or insolvency, in certain cases forfeiture allows a landlord to bring the lease to an end and recover possession of the premises.

However, the law surrounding commercial lease forfeiture is highly technical. Landlords must carefully navigate issues such as section 146 notices, waiver of the right to forfeit, peaceable re-entry and relief from forfeiture.

This guide explains when forfeiture may be available, how the process works and the key risks landlords and tenants should consider.

What is forfeiture of a commercial lease?

Forfeiture is the process by which a landlord terminates a lease and recovers possession of a property following a tenant’s breach of the lease terms.

In appropriate circumstances where tenants are in breach of covenant, forfeiture allows landlords to bring a lease to an end by re-entering the premises, or by obtaining a court order to end the lease. Common grounds for forfeiture include non-payment of rent, breaches of tenant covenants and tenant insolvency.

Forfeiture rights are an important and complex area of property law and, in certain cases, can offer landlords a powerful remedy. However, there are a breadth of highly fact-sensitive and technical issues to consider before forfeiting a lease, and each case requires detailed legal and commercial consideration.

When can a landlord forfeit a commercial lease?

A landlord can only forfeit a lease where the lease reserves an express right to do so.

Commercial leases almost always include an appropriate reservation of the landlord’s right to re-enter the premises and bring the lease to an end. The relevant clause will set out the circumstances in which the landlord can re-enter, which will usually include:

• non-payment of rent when it falls due, often subject to a short grace period;
• breaches of the tenant’s obligations under the lease; and
• the tenant’s insolvency.

The landlord’s ability to exercise this right will depend on the specific wording of the lease, the nature of the breach and the steps taken before forfeiture.

What is a section 146 notice?

For breaches other than non-payment of rent, a landlord must generally serve a notice pursuant to section 146 of the Law of Property Act 1925 before exercising its right to forfeit.

The section 146 notice must:

• specify and detail the alleged breaches;
• require the tenant to remedy the breaches, where they are capable of remedy; and
• allow a reasonable period for the tenant to do so.

If the tenant fails to remedy the breaches within a reasonable time, the landlord may proceed to forfeit the lease.

As the validity of a section 146 notice can be critical to the forfeiture process, landlords should take care to ensure the notice is properly prepared and served.

What is waiver of the right to forfeit?

A landlord can rely on a right to forfeit only if it has not waived that right.

Waiver can be a highly fact-sensitive area, but generally a right to forfeit is waived where a landlord acts in a way that treats the lease as continuing, and communicates that to the tenant, while already knowing of the tenant’s breach.

For example, waiver may occur where a landlord demands or accepts rent that falls due after it becomes aware of an existing breach on which it intends to rely.

If a landlord waives its right to forfeit, even unintentionally, it will lose the ability to forfeit for that particular breach. This can have significant consequences and is often one of the first issues that should be considered before taking enforcement action.

How does re-entry work?

The actual act of re-entering the premises can take one of two routes:

1. physically re-entering the premises and taking control by securing them; or
2. issuing court proceedings for possession.

Physical re-entry, often referred to as peaceable re-entry, is a quick and robust step that must be carried out carefully. There must be nobody physically present in the premises when re-entry takes place, so it will typically occur outside normal business hours or very early in the morning. Appropriate notices must also be served or displayed at the premises.

This approach can create a number of practical issues for landlords. Once the premises have been secured, the landlord will need to deal appropriately with any stock, equipment and other belongings left behind by the tenant. The landlord may need to store those items, permit collection or take lawful steps to dispose of them.

As a result, landlords should consider carefully both the legal and practical implications before proceeding with physical re-entry.

Can a tenant obtain relief from forfeiture?

Even where a landlord has successfully forfeited a lease, the court retains a discretion to grant a tenant relief from forfeiture.

The effect of relief from forfeiture is to place the tenant back into the position it would have been in had the forfeiture not occurred.

Relief from forfeiture for rent arrears

Where a lease is forfeited for non-payment of rent, a tenant will generally obtain relief if it applies to the court and pays:

• the rent arrears;
• any interest due; and
• the landlord's costs.

In most cases, the tenant will be entitled to make an application within six months of forfeiture.

Relief from forfeiture for other breaches

Where a lease has been forfeited for other breaches of covenant, the court may make relief conditional on:

• the breach being remedied; and
• compensation being paid to the landlord.

Whether relief is granted will depend heavily on the nature of the breach and the tenant’s ability to perform its obligations.

Importantly, a landlord and tenant cannot simply agree that the forfeiture did not take place or reinstate the lease between themselves. That requires a court order.

If a landlord forfeits a lease when it has no right to do so, it may become liable to the tenant for damages if the tenant is denied access to the premises or prevented from trading.

Key considerations for landlords and tenants

Commercial lease forfeiture remains one of the most effective remedies available to landlords where tenants fail to comply with their lease obligations. However, the process is governed by strict legal requirements and potential pitfalls.

Issues including the validity of a section 146 notice, waiver of the right to forfeit, the method of re-entry and the risk of relief from forfeiture should all be carefully assessed before action is taken.

For both landlords and tenants, forfeiture presents a myriad of potential issues and risks. Taking specialist legal advice at an early stage can help protect legal and commercial interests, avoid costly mistakes and ensure the correct procedures are followed.

Frequently asked questions about commercial lease forfeiture

Can a landlord forfeit a commercial lease for rent arrears?

Yes, most commercial leases allow a landlord to forfeit where rent remains unpaid after the period specified in the lease. However, landlords must always consider whether a right to forfeit has been waived.

Is a section 146 notice always required?

No. A section 146 notice is generally required for breaches of covenant other than non-payment of rent.

What is peaceable re-entry?

Peaceable re-entry is the process of a landlord physically re-entering and securing premises in order to forfeit the lease, without obtaining a court order.

Can a tenant get its lease back after forfeiture?

Potentially. A tenant may be able to apply to the court for relief from forfeiture, which can result in the lease being reinstated.

How long does a tenant have to apply for relief from forfeiture?

In cases involving rent arrears, an application is typically made within six months of forfeiture, although the specific circumstances of each case should always be considered.

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