Repossession of leasehold property

A lease can usually only be terminated before the end of the initial term if the freeholder and leaseholder agree, or if the leaseholder is in breach of a term of the lease.

A freeholder may only repossess a property for breach of the lease if the lease allows for forfeiture proceedings to be used.

Forfeiture is a way in which a freeholder can evict a leaseholder if they break a condition of the lease, such as not paying the ground rent or service charges.

For forfeiture proceedings to be available to a freeholder, the following conditions must be satisfied:

• a forfeiture clause in the lease – this is a provision allowing forfeiture and specifying under what circumstances it occurs

• the amount of unpaid ground rent, service charges or administration charges is more than £350 in total, or has been outstanding for more than three years[1]

• there is no outstanding arbitration appeal in relation to the same issue[2]

• where the breach is non-payment of service or administration charges, forfeiture cannot be used, except in cases where the leaseholder has admitted that it is payable, or there is a final determination by a court, First-tier Tribunal (Property Chamber) or arbitrator.[3]

A default judgment for unpaid service charges is a final determination for the purposes of section 81 of the Housing Act 1996 (ie a landlord's right of re-entry or forfeiture for failure to pay service charges) and, where a default judgment is entered, the issue is to be treated as having been determined between the parties to that judgment[4]

The provisions differ according to whether the breach is in respect of payment of rent or other charges, or some other term of the lease.

Non-rent breaches

In case of breach of a term (other than non-payment of rent or service charges or a breach not capable of being remedied), before forfeiture can occur the freeholder must serve a section 146 notice of forfeiture on the leaseholder to give them an opportunity to put things right. This is effectively a warning notice.

A notice of forfeiture does not need to be in any specific form but must include the following:[5]

• the breach of the term that the freeholder is complaining about

• a requirement that the leaseholder remedies the breach (if this is possible), and

• how much monetary compensation the freeholder requires from the leaseholder (if appropriate)

The freeholder seeking to forfeit the lease must first comply with section 168 of the Commonhold and Leasehold Reform Act 2002 which requires either that the breach is admitted by the leaseholder or that it is proved. The First-tier Tribunal (Property Chamber) has jurisdiction to make a determination that such a breach has occurred.[6]

Upon receipt of the section 146 notice of forfeiture, the leaseholder must remedy the breach and pay the monetary compensation (if applicable) within a reasonable time, depending on the circumstances of each case. A section 146 notice cannot be validly served on the leaseholder before the landlord’s right of re-entry has arisen (as set out in the lease).[7]

Even if a breach has been established, the freeholder cannot repossess an occupied property without a court order.[8] Vacant residential property can, however, be repossessed without a court order.

Rent breaches

In the case of non-payment of rent, a notice of forfeiture is not required, however the freeholder must serve on the leaseholder a notice that rent is due in the prescribed form.[9] Once the period of notice has expired, a period of grace must elapse before the right to forfeit can be exercised by the landlord. The length of the grace period is to be determined by reference to the terms of the lease (as the legislation does not provide for a period).[10]

Enforcement of forfeiture cannot occur until the freeholder has obtained a possession order from the court.[11]

Waiver

A waiver is the abandonment of a right by one party, so that they are stopped from claiming it. If there has been a breach of a term of the lease covered by a forfeiture clause the freeholder can either issue forfeiture proceedings or 'waive' their right to forfeit the lease.

Waiver can be express or implied. An implied waiver occurs when the freeholder knows there is a breach of a term and their actions confirms the continuation of the lease, for example by a demand for, or acceptance of, rent.[12] However the waiver only takes place if the landlord demands or accepts rent which became due after the date of a breach known to the landlord.[13]

Where a leaseholder has been served with a notice of forfeiture, or where forfeiture has occurred, or if the freeholder wishes to take further action for eviction in the courts, the leaseholder is entitled to ask for 'relief from forfeiture' from the court.

Rent arrears

Where the proceedings are brought in the county court, there is automatic relief if all the arrears and the costs of the action are paid into court at least five days before the hearing. If relief is not sought, any order for possession must give at least four weeks for the leaseholder to pay the arrears plus the costs. If the leaseholder pays all the rent and costs into court prior to expiry of the four weeks, there is automatic relief.[14]

There are similar provisions in respect of High Court possession actions.[15]

Where a lease is forfeited on the grounds of arrears, there is a six months’ time limit for county court applications for relief.[16]

In one case, where the flat was occupied by the non-resident leaseholder's tenants, what prevented the landlord form re-entering without issuing possession proceedings, the High Court held that the forfeiture and the six months' time limit had run from the date of the landlord's possession claim in the county court, not the date when the warrant was executed, and that, although the High Court was not bound by the six months' restriction, it should have regard to this time limit when deciding whether to exercise its equitable jurisdiction and grant relief on applications made out of time.[17]

Other breaches

The courts can grant relief from forfeiture for other breaches.[18]

The courts have been reluctant to lay down general principles governing relief and in essence, each case is treated individually. However, it would be most unusual for a court not to give relief, subject to the breach being remedied, and time is generally allowed to facilitate this.[19] The length of time depends on the circumstances of the case. Where the landlord can be put back into the position s/he would have been in if there had been no breach of covenant by the tenant paying money, the judge should order relief from forfeiture on conditions if there is reason to believe that the tenant can pay that money.[20]

If relief is not given, a possession order will be granted and the leaseholder usually has to give up the premises. The position of mortgagees and others with an interest in a property, such as sub-tenants, can be complicated in a forfeiture case, and they should take legal advice when they first become aware of the risk of forfeiture.

There is often a clause in the lease that allows landlords to pass on the costs of court proceedings to leaseholders through service charges.

Leaseholders can apply to the county court or First-tier Tribunal (Property Chamber) to exclude certain costs from service charges,[21] and where leaseholders have been successful in court or tribunal action, the court or tribunal may consider it unfair if they have to meet the landlord's costs via service charges.[22]

Due to the nature of forfeiture, leaseholders may find it is not in their interests to withhold rent from the freeholder where there is a dispute. The freeholder will be likely to take forfeiture or other court proceedings and will be able to force the leaseholder to pay the rent.

If the leaseholder does not pay, they will lose the property and any equity in it, and, in most cases, the leaseholder can expect to pay interest and the freeholder's costs as well.

In many cases, if a mortgage company has given a loan secured on a leasehold property which is subject to or at risk of forfeiture proceedings, the mortgage company may appoint receivers to pay monies owed on the lease in order to prevent forfeiture and protect its security.[23] The amount paid will be added onto the mortgage.

It is preferable for the freeholder and leaseholder to try to resolve any disputes by negotiation before resorting to the First-tier Tribunal (Property Chamber) or courts. The parties should consider getting legal advice at an early stage, before costs and interest become high and before positions are entrenched.