Waiver of right to Forfeit a Commercial Lease - Faiz v Burnley Borough Council

Author: Lara McDonnell
In: Article Published: Friday 20 March 2020

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WHAT IS REQUIRED FOR A LANDLORD TO BE DEEMED TO HAVE WAIVED ITS RIGHT TO FORFEIT A BUSINESS TENANCY?

This was recently considered by His Honour Judge Halliwell (sitting as a Judge of the High Court) in the case of Faiz v Burnley Borough Council [2020] EWHC 407 (Ch), handed down on 25 February 2020.

Particulars

The relevant particulars are as follows:

  • The first Claimant (C1) and second Claimant leaseholders (C2) and their sub-tenant, the third Claimant (C3), sought declaratory relief regarding their rights in cafe forming part of a historic country house in Lancashire (the property).
  • The Defendant (D), a local authority, was the freeholder of the property and head-landlord to C1 and C2 as head-lessees. The lease commenced on 26 February 2010 and was for a period of 10 years, expiring on 25 February 2020 (the Lease).
  • The Lease contained provisions restricting assignments and sub-letting and had a proviso for re-entry on breach (the forfeiture clause). It also contained a clause excluding 1954 Act security of tenure.
  • C1 and C2 had breached the Lease by entering into a sub-lease of the property with C3;
  • The Cs' solicitors wrote to D on 18 October 2019 alerting D to the sub-lease and advising that C3 had security of tenure under the same – C3 having a subsisting right to occupy the property upon expiry of the Lease.
  • On 30 October 2019 D served a section 146 notice on C1 and C2 providing notice of forfeiture on the basis of C1 and C2’s breach by subletting the property. The breach was stated to be incapable of remedy. on  22 November 2019, D had peaceably re-entered and forfeited the Lease.
  • One of the issues for determination by HHJ Halliwell was whether D had lost the right to forfeit by the time D had purported to exercise the right of forfeiture, because D had (allegedly) earlier waived its right to forfeit the Lease by previous actions;
  • Those previous actions were: (1) by demanding and accepting rent after they had become aware that C3 was in occupation; and (2) D submitting its invoice for the revised sum of £1,826.87 in respect of insurance rent (the revision foreshortened the period, just to 18 October 2019). Prior to 18 October 2019, that is, on 26 September 2019, D had invoiced C1 and C2 for insurance rent for the period until 25 February 2020. After receipt of 18 October 2019 letter, D had been concerned that this would now amount to a waiver of their right to forfeit – being a demand for rent after the period when D became aware of the breach, and so issued a further (second) invoice for insurance rent on 4 November 2019, but for the period until 18 October 2019 (namely the date D said they became aware of the breach).
  • Cs had paid this second invoice on 11 November 2019.
  • As a consequence, these proceedings were brought.
  • The date of D’s knowledge of the existence of the sub-lease was an important consideration for the Court, so as to ascertain whether their subsequent actions amounted to a waiver.

Legal Principles

HHJ Halliwell considered some relevant legal principles; at paragraphs 63 to 66, he said:

'A landlord waives its rights of forfeiture when, with full knowledge of the facts upon which its rights have arisen, it acts in a way consistent only with the continuation of the lease.

In Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850, Lord Diplock observed, at 883 A-C , that this type of waiver "…arises in a situation where a person is entitled to alternative rights inconsistent with one another. If he has knowledge of the facts which give rise in law to these alternative rights and acts in a manner which is consistent only with his having chosen to rely on one of them, the law holds him to his choice even though he was unaware that this would be the legal consequence of what he did. He is sometimes said to have "waived" the alternative rights, as for instance a right to forfeit a lease or to rescind a contract of sale for wrongful repudiation or breach of condition; but this is better categorised as "election" rather than as "waiver". It was this type of "waiver" that Parker J was discussing in Matthews v Smallwood [1910] 1 Ch 777 ".

In a passage of his judgment in Matthews v Smallwood (supra) at 786-787 — regarded as a classical statement of the law — Parker J stated as follows.

"Waiver of a right of re-entry can only occur where the lessor, with knowledge of the facts upon which his right to re-enter arises, does some unequivocal act recognizing the continued existence of the lease. It is not enough that he should do the act which recognizes, or appears to recognize, the continued existence of the lease, unless, at the time when the act is done, he has knowledge of the fact under which, or from which, his right of entry arose. Therefore we get the principle that, though an act of waiver operates with regard to all known breaches, it does not operate with regard to breaches which were unknown to the lessor at the time when the act took place. It is also, I think, reasonably clear upon the cases that whether the act, coupled with the knowledge, constitutes a waiver is a question which the law decides, and therefore it is not open to a lessor who has knowledge of the breach to say "I will treat the tenancy as existing, and I will receive the rent, or I will take advantage of my power as landlord to distrain ; but I tell you that all I shall do will be without prejudice to my right to re-enter, which I intend to reserve". That is a position which he is not entitled to take up. If, knowing of the breach, he does distrain, or does receive the rent, then by law he waives the breach, and nothing which he can say by way of protest against the law will avail him anything. Logically, therefore, a person who relies upon waiver ought to shew, first, an act unequivocally recognizing the subsistence of the lease, and secondly knowledge of the circumstances from which the right of re-entry arises at the time when the act is performed". 

Having endorsed this statement of the law, Aldous LJ confirmed, in Cornillie v Saha and Bradford & Bingley Building Society (1996) 72 P&CR 147 at 155-156, that there was an additional requirement, namely that the landlord's act of recognition must be communicated to the tenant.'

Analysis

After consideration of Metropolitan Properties Co Ltd v Cordery (1980) 39 P&CR 10, Woodfall on Landlord and Tenant, volume 1 at paragraph 17.098, Price v Worwood (1859) 4 H & N 512, Osibanjo v Seahive Investments Ltd [2008] EWCA Civ 1282 and Mannai v Eagle Star [1997] AC 749, the Court analysed the position as follows:

  • The Court found that D had knowledge of C3’s occupation since January 2018, as they had been receiving rental payments from C3 since before they were notified of the existence of the sub-lease by the Cs’ solicitors, nonetheless they had not been advised of the sub-lease (as distinct from mere occupation) by C1 and C2 at that stage and there was no reason why C3 could not have been occupying the property as a licensee.
  • The Court thus rejected the submission that there had been a waiver earlier than 18 October 2019 by receipt of rental payments, as D had no notice of any material change in circumstances, or that a sub-tenancy had been granted before this date so as to activate any waiver.
  • The argument that issuing a second invoice, for a revised insurance rent up to 18 October 2019, somehow amounted to a waiver, was also rejected by the Court. D’s intention in issuing the subsequent invoice was to restrict its demand for insurance rent to the period up until they first had knowledge of the breach / sub-letting, which the Court had found was 18 October 2019. The revised invoice was a recalculation on that basis, not a fresh demand for rent, therefore it could not be regarded as a waiver of D’s right to forfeit.
  • Consequently, the Court found that the right to forfeit had not been waived, and so dismissed Cs claim for a declaration that a waiver had occurred. Indeed, the Court stated that D was '...entitled to a declaration that the Lease and the 2017 Sublease determined on 22nd November 2019' (paragraph 84).

Thus in summary, at the time of D’s impugned rental demand, D was deemed not to have knowledge of the breach (only that C3 was in occupation), so D’s actions were not regarded as a waiver. The second invoice, even if construed as a demand for insurance rent at a time when D had knowledge of the breach, was only for insurance rent for the period up to the point of knowledge of the breach, so likewise would not be regarded as a waiver of D’s right to forfeit.

As will be evident from the Court's judgment, the vital point in cases of this nature is the extent of the Landlord’s knowledge at the time a demand for rent (insurance or other type of rent) is made and whether the Landlord’s actions are consistent only with the continuation of the Lease.

LARA MCDONNELL © 2020

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.