A well drafted commercial lease should contain a forfeiture clause, and most do. Forfeiture or re-entry is the landlord's right to determine the lease (bring it to an end) in certain circumstances:
- When the tenant is in breach of any of its obligations (‘covenants’) under the lease;
- When certain specified events occur, e.g. the tenant’s insolvency (‘conditions).
The right to forfeit must be expressly stated in the lease. The right will usually be reserved in the event of rent being unpaid for a certain period of time, and may well be reserved for other covenants, such as to repair and maintain the property.
For rent, the mere fact of non-payment within a specified time will entitle the landlord to forfeit, and this can often be done without any involvement from the court. For other breaches, the landlord will need to serve a s.146 notice allowing the tenant a reasonable time to remedy the breach, and only if they then fail to do so, can the landlord then apply to the court for forfeiture.
A recent case involved a commercial lease of 20 years duration. The lease contained a forfeiture clause giving the landlord the right to re-enter the premises and bring the lease to an end in the event of non-payment of rent and other breaches of covenants or conditions by the tenant or their guarantor.
One of the conditions of the lease effectively meant the lease could be forfeited if the tenant or their guarantor was “unable to or deemed unable to pay its debts within the meaning of sections 122 or 123 of the 1986 Act". The lease defined 1986 Act as the Insolvency Act 1986 (IA 1986).
Now, the IA 1986 states that the test of whether a company is deemed unable to pay its debts require it to be “proved to the satisfaction of the court". In this case, the landlord served a section 146 notice on the guarantor, alleging there was a breach of condition of the lease because it was unable or deemed unable to pay its debts under the IA 1986.
The guarantor was successfully able to defend this claim and resist forfeiture of the lease because of the exact wording of the lease and the legislation to which it specifically referred, namely the IA 1986. At the time the s146 notice was served there and had been no court involvement and the court had certainly not determined that the guarantor was unable to pay its debts (as the IA 1986 requires), and as such the relevant condition as drafted in the lease has not been breached.
Whilst this case may seem somewhat specific and niche, it’s actually an excellent reminder that with all leases, in fact with all contracts, the wording is absolutely critical. Had the lease contained a different definition of what “being unable to pay its debts” meant, then the case would, in all likelihood have had a different outcome.