Property Focus June

Waiver of forfeiture and acceptance of rent - a tricky point clarified

When a tenant is in breach of a covenant which gives the landlord the right to forfeit, the landlord has two choices: it can either forfeit the lease or choose to continue with the tenancy and waive its right to forfeit.  Waiving a right to forfeit can be done expressly or by implication, for example by doing something which shows that the landlord regards the lease is continuing.  A common example of waiving this right is when the landlord demands or accepts rent after being made aware that a breach of covenant has been committed.

But what happens when a landlord accepts rent which was due after the breach of covenant took place, but before the landlord knew of the breach?  Does this mean that the landlord has waived its right to forfeit?  This was the scenario which the Court of Appeal considered in the case of Faiz v Burnley Borough Council [2021].

Facts of the case

Burnley Borough Council (BC) granted a lease of a café to Mr Faiz and his daughter (F) which was due to expire on 25 February 2020.  The lease contained common terms including the payment of insurance rent within seven days of demand, an absolute prohibition on sub-letting and a forfeiture clause in the event of a breach of covenant.

Specifically, the timeline in the case was important:

• Late September 2019/early October 2019. F granted a sub-lease to a company wholly owned by one of them, which was in breach of the absolute covenant against sub-letting.
• 26 September 2019. BC (unaware of the sub-letting) demanded insurance rent due from 1 April 2019 to 25 February 2020.  The sum was due for payment on 2 October 2019 but was not paid by F.
• 18 October 2019. F informed BC of the sub-letting.
• 30 October 2019. BC served a section 146 notice on F relying on the fact that the grant of the sub-lease gave rise to a right to forfeit.
• 4 November 2019. BC sent a revised demand for immediate payment of the insurance rent, but the figure demanded had been recalculated for the period from 1 April 2019 to 18 October 2019 (when BC became aware of the breach).
• 11 November 2019. F paid the insurance rent which was accepted by BC.
• 22 November 2019. BC purported to forfeit the lease by peaceable re-entry.

F applied to the High Court for relief from forfeiture arguing that BC had waived its right to forfeit by demanding the payment of insurance rent on 4 November and/or accepting the payment of rent on 11 November.  The High Court held that BC had not waived its right and F appealed to the Court of Appeal.

Decision

The Court of Appeal dismissed F’s appeal after considering two main questions:

• Did the original demand for insurance rent on 26 September result in BC waiving its right to forfeit the lease as it was sent after the breach occurred? The Court held that it did not; it was unclear exactly when the sub-lease was granted and so F was unable to prove that the insurance rent had accrued due after the date of the breach.  The insurance rent was due on 2 October but there was no clear evidence that the sub-lease had been granted before then.  In any event, B did not know about the breach until 18 October and so the 26 September invoice could not be regarded as a waiver of B’s right to forfeit.
• Was the revised demand on 4 November 2019 a new demand for insurance rent accruing due after BC had knowledge of the breach of covenant? The Court found that it was not as the revised demand was simply an indication that BC was willing to accept payment of a lower sum than under the 26 September invoice.  BC re-calculated payment up to the point of its knowledge of the breach and so this could not be regarded as a waiver of BC’s right to forfeit.

Practical points

The crucial question was whether the demand and acceptance of rent by the landlord amounted to waiver when the rent fell due after the breach, but before the landlord had knowledge of the breach.  There has been no binding authority on this particular point and so clarification from the Court of Appeal is helpful.  The ruling confirms that in order to show that a landlord has waived its right to forfeiture, it must have knowledge of the breach and also that the rent demanded or accepted fell due after the date of the breach.

Most importantly, the case is a reminder of the need for landlords to investigate the facts fully and establish the legal position when faced with a breach of covenant in similar circumstances.  The law relating to forfeiture is complex particularly in relation to payments - understandably a landlord will want to recover as much rent as possible, so specialist legal advice is vital to avoid inadvertently waiving the right to forfeit. 

If you would like to discuss this topic in more detail, please speak to James Atkins or Rob Harrison.