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Relief from forfeiture for deliberate breaches of covenant – the Court of Appeal gives guidance in Freifeld

Mixed residential and commercial developments frequently cause problems for the residential occupiers and work for lawyers, in particular when the commercial units are let to bars or restaurants which create noise and nuisance in the evenings and at weekends.

The problems caused by a unit sub-let to a Chinese restaurant – poor waste management, smoking breaks and food preparation in a courtyard behind the restaurant which was outside the demise, and noisy air-conditioning units - lie behind the latest case in which the Court of Appeal has been asked to consider whether, and if so on what terms, a tenant whose breach of covenant is wilful, that is to say deliberately committed, should ever be given relief from forfeiture.

The case in question is Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806 (Arden, Ryder, Briggs LJJ), judgment been given on 30th July 2015, in which the tenant’s appeal from the decision by HHJ Gerald in the Central London County Court to refuse relief was allowed, but on terms that the tenant obtain a purchaser for their lease within six months.

The reasoning appears to be that relief may be given even when there have been deliberate breaches if the landlord has not been irreparably damaged by the breach; but it is not enough on its own to find that the effect of forfeiture would create a windfall for the landlord. It also appears that some clever post-judgment lawyering by those acting for the tenant in putting together a package they could ‘sell’ to the appellate court might well have made a positive difference to the outcome.

The appellants, Mr and Mrs Freifeld, owned the head lease of seven commercial retail units in a block of residential flats in West Kensington. The head lease has been granted in 1982 for a term of 99 years, thus 67 years unexpired at the date of trial, and the rack rent achievable was £133,000. It was common ground that the value of the lease was somewhere between £1-2m, thus a valuable asset. The respondents, West Kensington Court Limited, owned the freehold.

The Freifelds' lease contained a covenant against alienation in the usual terms, not to underlet the whole or part without the landlord’s consent, such consent not be unreasonably withheld.

One of the seven units was that let to a Chinese restaurant whose business caused numerous complaints none of which had been satisfactorily dealt with. Despite this, in December 2011 the Freifelds granted the restaurant a future sublease, knowing that the landlord’s consent should have been sought but choosing not to ask for consent, presumably because they knew that it would not have been forthcoming.

In May 2012 the landlord served a s146 notice; they then forfeited (by counterclaim in other proceedings) following which the Freifelds applied for relief.

At trial the judge acknowledged that if the lease remained forfeit the landlord would receive a windfall, but observed that in such a case it should make the tenant more punctilious about observing the covenants. This might be described as the ‘hard cheese’ line of reasoning from a case hardened county court judge. Judge Gerald expressed concern about the Freifelds’ mismanagement of the premises and the historic problems the restaurant had caused. The application for relief from forfeiture was thus dismissed.

At around the time the draft judgment was handed down the tenant’s lawyers sprung into action and came up with ideas to solve their clients’ problem, ideas which were ultimately successful. There was a post judgment application in which the Freifelds sought relief on condition that they be given six months to sell and assign the lease. That was refused by Judge Gerald.

Following judgment the Freifelds applied for permission to appeal, which they obtained, and a stay was granted. They then appointed well regarded managing agents, Maunder Taylor, to manage the units and deal with the commercial tenants.

That was the position when the matter came before the Court of Appeal where the lead judgment was given by Arden LJ.

Referring to the decision in Southern Depot Co Ltd v British Railways Board [1990] 2 EGLR 39, Arden LJ accepted (and there was no argument to the contrary) the principle that relief can be granted even though a breach is deliberate, and not only in ‘exceptional’ cases, whatever they are. She observed that the fact that a leasehold has a substantial capital value is a relevant factor but that in itself is not enough to grant relief.

Arden LJ’s summary of the law at para. [47] is likely to be treated as a very useful condensed statement of principle for advocates who have to argue similar cases in the county court in future:

“The windfall point is about proportionality. The appellants’ 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 the appellants’ egregious conduct. 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.”

Reassured by the fact that the units were now under professional management the Court of Appeal were attracted by the tenant’s post –judgment application based on a promise to sell the leasehold within six months. Mr and Mrs Freifeld were granted relief on condition they sell the lease within six months, the respondents’ (reasonable) consent to an assignment being a condition of grant of relief.

The six month sale period started on 1st September 2015. It will be interesting to see if the Freifelds do in fact find a buyer, and if so at what price. It can be truly said in this instance that it is a buyer’s market.

The last word in this case, and in fact the last paragraph in the judgment, goes to Briggs LJ

“[68] This conclusion 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.”

Deliberate breaches of covenant by one’s client are always going to cause lawyers problems; simply saying sorry, that one will not do it again, and offering to pay costs, is often not going to be enough to persuade a court to grant relief. The solution proposed by the Freifelds lawyers in this case was a well-thought out one. Professional management is always a good idea; and judges do not like to force unsatisfactory tenants upon unwilling landlords, so the offer to sell was a critical factor in making the application for relief attractive.                                                                                                                            

John de Waal, QC