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Property Law - Running with the Red Queen… New Restrictions on Forfeiture

By : Rupert Higgins

The most curious part of the thing was that the trees and the other things around them never changed their places at all: however fast they went, they never seemed to pass anything.
"I wonder if all the things move along with us" thought poor puzzled Alice. And the Red Queen seemed to guess her thoughts, for she cried "Faster! Don't try to talk!"

Lewis Carroll, Through the Looking Glass

In December 1999 the Government announced that it was minded to abolish forfeiture altogether and to replace it with a regime which would compensate the dispossessed leaseholder for the loss of his leasehold interest after the Landlord had recovered his losses arising from the breach as well as his costs and charges. It was not practicable to prepare what would be a complex piece of legislation in time for inclusion in the Commonhold and Leasehold Reform Bill and at the time the Law Commission had started work on new proposals for a radical overhaul of the law relating to the termination of tenancies generally. In the meantime, however, further restrictions on the use of forfeiture as a sanction for breach of covenant in long residential leases were included in the Bill and ss. 167-171 of the Commonhold and Leasehold Reform Act 2002 will be part of the next wave of provisions to be brought into force.

S. 167 - small debts for short periods

Section 167 of the Commonhold and Leasehold Reform Act abolishes forfeiture for failure to pay small sums of money unless that debt has been outstanding for more than a prescribed period. A small debt is one of less than £350 and the prescribed period is 3 years. Alive to the fact that in a great many leases, particularly where the landlord does not levy service charges or provide management services, the only payment due under the lease may be an annual ground rent of no more than £50, the 3 year period has been introduced to prevent the new provision from being used as a licence for a leaseholder to pay nothing at all under his lease for many years. So if the debt or any part of it is more than 3 years old the sanction of forfeiture becomes available even if the arrears then accrued are no more than, say, £150. In order to prevent the provision being circumvented by the inclusion of a penalty charge in a lease which brings the total sum above £350 automatically upon any failure to pay, any such charges are to be left out of account in calculating the sum due for these purposes.

S.168 - No forfeiture before determination of breach

Section 168 introduces a further hurdle before the landlord can commence proceedings for forfeiture of long residential leases. This provides that before the landlord can even serve a s.146 Notice there must have been a final determination or an admission that a breach of covenant has occurred. Of course this will not prevent forfeiture for non-payment of rent, where no s.146 notice is required before commencing proceedings, but most ground rent arrears will be caught by the £350 minimum provided in s.167, and where the claim is for service charges which are reserved as rent, s.81 Housing Act 1996 already provides for a determination by the LVT as a precondition for forfeiture.

It is important to note that the only question to be determined by the LVT on an application by the Landlord will be whether a breach has occurred. If it is satisfied that the leaseholder is in breach, it will find accordingly and the landlord will be permitted to serve a s.146 Notice starting the existing procedure for forfeiture. TheLVT is not interested in issues of waiver or the crucial question of relief, on which most forfeiture actions are fought.

The scope for duplication is obvious. Of course in a great many cases the question of whether a breach of covenant has occurred will be a simple one, for example where the breach consists of non-payment of a sum of money. Such claims are currently simply contested on the issue of whether, and if so on what terms, relief from forfeiture ought to be granted rather than on the question of whether a breach has occurred at all. But frequently issues of whether a breach has occurred, and if so whether relief ought to be granted, both turn on the seriousness of the matter complained of rather than the thing itself. Breaches of covenants to keep in repair, and covenants against causing a nuisance, tend to turn on questions of fact and degree. The seriousness of the disrepair, or the seriousness of the leaseholder's conduct, are pertinent both to the question of the terms of relief, and whether a breach of covenant has occurred at all. The two enquiries often require a detailed examination of the same facts. S.168 requires that examination to be conducted twice - at different times and before different tribunals.

Costs

Each additional hurdle means additional costs. The LVT has no jurisdiction to award costs against a losing party unless that party has behaved frivolously, vexatiously or unreasonably, and even then the successful party's costs are limited to £500. Whether a successful Landlord's costs before the LVT will be recoverable under the lease will depend upon the wording of the relevant covenant, and it cannot be assumed that a covenant to indemnify the Landlord for his s.146 costs will cover the required application before the LVT. Either way those representing landlords will understand the feeling of running faster and faster in order to stand still.