Legal Issues for Managing Agents– Forfeiture Proceedings,a Legal Briefing

publication date: Jun 14, 2006

Homeowners of long leasehold properties throughout England no doubt welcomed the new measures of protection afforded to them through the recent amendments to the Commonhold and Leasehold Reform Act 2002, which came into force on 28 February 2005. The practical effect of some of the amendments is to restrict the landlord’s right to forfeiture of long residential leaseholds.

While this is good news for homeowners, where does this leave the landlord or the managing agent acting on behalf of the landlord? It seems that forfeiture is no longer the most practical way of recovering a debt.

The reforms to the Commonhold and Leasehold Reform Act 2002 which relate to forfeiture can be separated into three areas:

n No forfeiture for non payment of less than a prescribed sum or the amount has been unpaid for a short period;

n A landlord cannot serve a Section 146 Notice unless the breach of covenant complained of, other than a non payment of rent or service charges, has first been proved;

n No Service of a Section 146 Notice for non-payment of service charge unless the leaseholder agrees the charge, or, until it has been determined by the Leasehold Valuation Tribunal (herein referred to as ‘LVT’).

SECTION 167 - NO FORFEITURE FOR SMALL AMOUNTS FOR SHORT PERIODS

Section 167 of the Commonhold and Leasehold Reform Act 2002 abolishes the landlord’s right to forfeiture where a ‘small amount’ is owed for a ‘small period’, for either rent, service charge or administration charges. The ‘small amount’ is defined in the – Right of Re-entry & Forfeiture (Prescribed Sum & Period) (England) Regulations 2004 as £350.00 and a ‘small period’ is defined as 3 years.

The debt cannot include interest, administration charges for non payment or legal costs. Thus preventing the landlord or managing agent from charging administration charges in order to satisfy the provisions of Section 167 and taking it over the specified amount.

In practical terms if the tenant has a debt, which is 3 years old, the remedy of forfeiture becomes available to the landlord; despite the fact the debt is only £100.00.

SECTION 168 - DETERMINATION OF THE BREACH FOR OTHER BREACHES OF COVENANT

Section 168 of the Commonhold and Leasehold Reform Act 2002 places restrictions in respect of a landlord’s right to forfeit a long residential lease where there is a breach of covenant in the lease, other than non-payment of administration or service charges.

A landlord is no longer permitted to serve a Section 146 Notice for a breach of covenant in a lease, such as nuisance, alterations or disrepair until 14 days have elapsed since the LVT or the court has determined that a breach of covenant has occurred or breach was admitted by the tenant. A landlord can apply to the LVT for a determination; however no final determination will be made until all avenues of appeal have been exhausted.

SECTION 170 – FORFEITURE FOR FAILURE TO PAY SERVICE CHARGE OR ADMINISTRATION CHARGES

Section 170 of the Commonhold and Leasehold Reform Act 2002 has amended Section 81 of the Housing Act 1996 and placed a further restriction on a landlord’s right to forfeiture for a tenant’s non payment of service charges. Thus outstanding service charges can no longer be used as a reason to forfeit a long residential lease because a Section 146 Notice cannot be served by the landlord unless it has been determined by the LVT or a court that the amount claimed by the landlord is actually owed or the tenant admits that the amount is payable.

The Section 146 Notice may only be served after 14 days have elapsed from the final determination, enabling the tenant further time to pay. Again, all avenues of appeal must be exhausted before a final determination will be made.

Although the law of forfeiture has been restricted by the recent amendments to the Commonhold and Leasehold Reform Act 2002, it has not been abolished. It is therefore important that where a right to forfeiture exists, the landlord or the managing agent acting on the landlord’s behalf does not waive it.  

This area of the law of forfeiture can be complex and confusing. The list of actions that would waive a right to forfeiture, is not exhaustive. The basic principle is that where a right to forfeit arises the landlord is put to an election in the sense they must choose to either treat the lease at an end or continuing. If the landlord, once aware of the breach, does any act, which treats the lease as continuing, they will have waived any right to forfeit that existed, irrespective of the landlord’s intention.

To avoid unintentional waivers – it would assist landlords and managing agents responsible for the daily management of long residential leasehold properties to understand these few simple guidelines:

n Demand for or acceptance of rent and or service charge (herein referred to as rent) which accrued due after the landlord became aware of a right to forfeit, whether payable in arrears or in advance, will waive the right to forfeit. Thus if there is a breach on 1 April, any acceptance of rent due on or after 1 April will waive the right to forfeit for that breach. It is critical to note that this cannot be avoided by so called clever drafting of the lease – that acceptance of rent as “without prejudice” to the right to forfeit.

The only exception is if the landlord didn’t have knowledge of the breach when accepting the rent. An agent however, could waive a landlord’s right to forfeiture, which is important for managing agents every where to be aware of in their daily management of long leasehold properties. Thus a managing agent could be aware of a breach, rather that the landlord and the managing agent’s knowledge will be imputed to the landlord.

So if we look back to our example above on 1 April, if the managing agent accepts rent due on or after that date, then they have waived the landlord’s right to forfeiture because their knowledge of the breach is imputed to the landlord. Similarly, if the landlord accepts rent on or after 1 April, albeit in ignorance of the agent’s knowledge of the breach, the right to forfeiture will have been waived. See the decision of Metropolitan Properties v Cordery (1979) 39 P & CR 10.

n Demand for or acceptance of rent, which accrued due before the landlord became aware of a right to forfeit; whether it is payable in advance or arrears, will not waive the right to forfeit. See the decision of Re a Debtor [1995] 1 WLR 1127.

n Breaches can be defined into two categories, either a once and for all or continuing. The former may involve non-payment of rent, where as the latter may relate to the lessee failing to keep the property in a good state of repair. If the landlord acts in a way, so as to elect to treat the lease as continuing, this will absolutely waive once and for all breaches, but where it is a continuing breach it will only waive the continuing breach up until the date of waiver. If the breach continues the following day a fresh right to forfeit will arise.

n Once an act of forfeiture is taken by a landlord, whether it is a peaceable re-entry or service of proceedings, then no act will amount to a waiver, as the act itself amounts to an absolute election to treat the lease as having ended.

At the end of the day this can be a complex area of the law and the best action a landlord or managing agent could take is to seek advice from their lawyer the moment they discover a breach, which could give rise to a right to forfeiture. There are numerous pitfalls, which can be avoided if advice is sought early on.

Cherie Robinson is a member of Brethertons LLP’s Property Management Team. www.brethertons.co.uk