‘Wilful’ breach of lease not sufficient to allow landlord to terminate, court rules

Out-Law News | 05 Aug 2015 | 11:35 am | 3 min. read

A tenant who “wilfully” breached the conditions of his lease by sub-letting to an obnoxious sub-tenant without the consent of the ultimate landlord should not be forced to forfeit the lease immediately, the Court of Appeal has ruled.

The appeal court ruled that a High Court judge had been correct to weigh the tenant’s deliberate actions against him when deciding whether to grant ‘relief from forfeiture’, but had not considered whether forfeiture was proportionate. The fact that the landlord stood to gain a ‘windfall’ of between £1 million and £2m if the tenant's lease was forfeited was also relevant, although not conclusive, the appeal court said.

The tenant, a Mr Freifeld, should instead be given six months to sell his interest in the properties, the appeal court said.

Property law expert Tim Dale of Pinsent Masons, the law firm behind Out-Law.com, said that although the decision did not establish any new law, it showed “starkly” that “forfeiture is not a punishment intended to give a landlord a windfall, but rather a tool to require a tenant to comply with its covenants”.

The dispute involved a row of shops in London’s West Kensington district, acquired by Freifeld for a premium in 1982 for a 99-year term. The head lease was of significant value, as only an annual insurance rent was payable under it and each unit could be sublet at a market value of around £133,000. The units were located below a row of residential properties.

In December 2011, Freifeld granted a sub-lease to what was described by the court as a “controversially-run Chinese restaurant”, which attracted a number of nuisance and annoyance complaints from the residential tenants. At trial, Freifeld admitted that this sub-lease had been granted “deliberately” without the consent of the head landlord, in breach of alienation provisions in the head lease. When the landlord found out about the breach, Freifeld forfeited the lease, so he applied to the court for relief. However, the High Court judge refused relief “in light of … what the judge found to be the attitude of [Freifeld and his wife] towards their responsibilities under the head lease”.

By the time that the case reached the High Court, the Freifelds had “realised the seriousness of what they had done”, according to the judgment. Rather than seek relief from forfeiture entirely, they instead sought relief “on condition that they be given six months within which to complete the sale and assignment of the commercial lease, failing which it would be surrendered”. They argued that it would be unjust for the head landlord to gain a “windfall” in rent from the sub-tenants as a result of the forfeiture order. However, the High Court judge refused this application too.

In her leading judgment for the Court of Appeal, Lady Justice Arden said that the High Court judge was “clearly right to make findings about the wilfulness of the breach and to take his findings into account in deciding whether to grant relief from forfeiture”. However, she said that the head landlord’s “windfall” as a result of the forfeiture raised questions of proportionality, which the High Court judge had not taken into account at trial.

“[Freifeld’s] egregious conduct is not relevant to the question of the windfall, which was a self-standing consideration to be considered on its own merits and then weighed against [his] egregious conduct,” she said. “Once it has been appreciated that the value of the leasehold interest is an advantage which the respondent will obtain from forfeiture, it has to be thrown into the balance with all the other circumstances.”

“In my judgment, the judge failed to do this. He took the view that there was no injustice in refusing the application to have time to sell the head lease within six months since the ‘appellants are simply reaping what they have sown’ … He did not consider the possibility that there should be no forfeiture if the leasehold interest could be sold on suitable conditions. If he had done this, he would have seen that there was a way of squaring the circle between the lessor’s right to enforce its right of re-entry and the lessees’ right not to be required to give the lessor some uncovenanted benefit,” she said.

She ruled that Freifeld should be given six months, starting on 1 September after the holiday period, to sell his interest in the properties. This could be done on the open market, without the head landlord having any control over the marketing of the properties or the ultimate purchaser of the lease, she said.

In a supporting judgment, Lord Justice Briggs said that the appeal court’s ruling “should not be misinterpreted as conferring carte blanche on tenants to disregard their covenants, wherever there is value in their leasehold interest which would be lost by an unrelieved forfeiture”.

“In every case a balance will have to be struck, and there may well be cases where even substantial value has to be passed to the landlord, if no other way of securing the performance of the tenants’ covenants can be found,” he said.