March 23, 2020

Rent arrears and forfeiture – a complex predicament

Summary

This case considered whether the exercise of Commercial Rent Arrears Recovery (“CRAR”) under the Tribunals, Courts and Enforcements Act 2007 (the “Act”) waives the right of a commercial landlord to forfeit a lease for the rent arrears.

Background

Thirunavukkrasu was the tenant of commercial retail premises in Teddington (the “Property”). The Brars were the landlords pursuant to a Lease dated 10 July 2013 (the “Lease”). Under the Lease an annual rent of £15,000 was due on quarterly days in advance on 25 March, 24 June, 29 September and 25 December. The permitted use of the Property was as a retail shop. The Lease contained a proviso for re-entry if rent was unpaid for 21 days after becoming due.

The rent due on 25 December 2015 was not paid. On 18 January 2016 the Landlord instructed enforcement agents to exercise CRAR. On 1 February 2016 the enforcement agents went to the Property and took control of the Tenant’s goods in order to recover arrears and fees totalling £10,533.20. On 12 February 2016 the Lease was purportedly forfeited by the Landlord by peaceable re entry. On 15 February 2016 the Landlord received £8,270 from the enforcement agents.

Issues

CRAR enables a landlord to instruct an enforcement agent to take control of the goods of a tenant of commercial premises and to sell the tenant’s goods in order to recover the rent arrears.

Various previously decided cases established that a landlord levying distress (a common law remedy similar to CRAR which was replaced by CRAR in 2014) would waive the right to forfeit.

First Instance

Proceedings were issued by the Tenant who argued that the forfeiture was unlawful and claimed damages for trespass and breach of covenant as well as damages for the conversion of the goods that were subject to the CRAR.

Specifically, the Tenant argued that in exercising CRAR the Landlord had unequivocally acknowledged the continuing existence of the lease and, therefore, had waived their right to forfeit for non-payment of any sums due up to and including the quarter’s rent that fell due on 25 December 2015.

Her Honour Judge Baucher sitting in the County Court in Central London ordered that there be a trial of the preliminary issue of whether or not the Landlord’s supposed forfeiture of the Lease was lawful or not. Judge Madge held that where a right to forfeit arises, the Landlord has to make an election. Judge Madge held that just as distress for rent was an election to treat the lease as continuing to exist, the election to pursue CRAR in this case also acknowledged the continuing existence of the Lease.

Thus, the purported forfeiture was held to be unlawful and damages for breach of covenant and trespass were awarded.

On Appeal

The Landlord appealed to the High Court on three grounds:

  1. As a matter of law the exercise of CRAR did not amount to a waiver forfeiture merely because under the old regime distress did amount to a waiver of forfeiture
  2. There was in fact no legitimate CRAR at all, as the Landlord had not served notice of enforcement on the Tenant as required by the Act
  3. The Landlord was entitled to rely on section 210 of the Common Law Procedure Act 1852. (Right to forfeiture is not waived if 6 months or more rent is in arrears)

The most significant ground of appeal was that the exercise of CRAR did not amount to a waiver of the right to forfeit.

The appeal was heard by Marcus Smith J and his judgment dismissing the appeal held that the “exercise of CRAR… contained an unequivocal representation that the lease was continuing”.

Court of Appeal

The Tenant’s grounds of appeal to the Court of Appeal mirrored those heard before Marcus Smith J (as above).

Ground 1

On Ground 1. The Tenant argued that under section 79(4) of the Act CRAR could be exercisable up to 6 months after the end of the Lease. As such, and by reference to a “parallel world” in which the Lease had ended the Tenant argued CRAR was not necessarily an unequivocal affirmation of the continued existence of a Lease.

The Court of Appeal found that the Tenant’s analysis was “flawed on several grounds”. First the court rejected the need for reference to a “parallel world”.

Second, the court highlighted that pursuant to section 79(4) (a) of the Act CRAR can never be exercised when a lease has been brought to an end by forfeiture.

Third, it was held that the existence of any statutory power cannot determine whether the exercise of CRAR waives the right of forfeit.

Fourth, and most importantly, it was held that “since CRAR can be only be exercised by a lessor and, by virtue of section 79(4)(a) of the Act, cannot be exercised after termination of the lease by forfeiture, CRAR in principle amounts to an unequivocal act confirming the lessor’s decision to affirm the continuation of the lease, just as was the levying of distress at common law”.

For these reasons, Ground 1 was rejected. The court’s view was that in situations where forfeiture was the only way the Lease could be brought to an end, CRAR must amount to a waiver.

Ground 2

The Landlord submitted that their own purported exercise of CRAR was invalid because no notice was given to the Tenant prior to the enforcement agents attending the Property. As such, the Landlord argued that the Tenant was not aware that the landlords had purported to exercise CRAR, meaning that no unequivocal representation that the lease was continuing had been made to the tenant.

The Court of Appeal considered there to be “no merit in this ground of appeal”. The court held that Marcus Smith J was entitled to form the view that the Tenant knew that CRAR had been commenced as a result of the presence of enforcement agents at the Property notwithstanding the fact the Landlord had not given formal notice of the CRAR to the Tenant. The fact that the CRAR was not lawful was no less an indication of the Landlord’s state of mind.

Ground 3

On Ground 3 the court held that the Landlord appellant could not rely on section 210 of the Common Law Procedure Act 1852, to argue that the right to forfeiture had not been waived (because six months or more rent was in arrear at the date of CRAR). The court held that this approach would amount to substantially re-writing the law and that distress (and now CRAR) “operate at common law to waive forfeiture in all cases but section 210 provides the Landlord with a statutory defence to a claim for waiver should the Landlord subsequently bring proceedings for possession pursuant to that section.”

Implications

This judgment should come as a reminder to landlords that they must carefully consider their interactions with tenants in situations where they might want to pursue forfeiture.

If a landlord exercises CRAR the tenant must fall into arrears in a subsequent rental period before the landlord is free and able to exercise forfeiture. As such, when faced with a choice between CRAR and forfeiture, landlords must carefully consider which of the two options is preferable in the circumstances.

Landlords who unlawfully prematurely terminate leases with many years to run may face significant claims from their wrongfully dispossessed tenants. This case illustrates the importance of seeking advice as to the most effective strategy when faced with the choice between attempting to recover rental arrears and forfeiture.

The article first appeared in our Real Estate Bulletin - March 2020.