Tenant granted relief from forfeiture, despite a deliberate breach of covenant

A court has granted relief from forfeiture to an insolvent tenant of a long lease, despite the tenant’s deliberate breach of a keep open covenant.

Background

Forfeiture is an express right reserved in a lease allowing the landlord to end the lease early either where a tenant is in breach of its lease obligations, or on the occurrence of certain events specified in the lease, such as a tenant's insolvency.

In a depressed market forfeiture is usually a last resort for landlords, as it means the lease will be at an end and a new tenant will have to be found. It does not recoup any arrears that may have accrued, and the landlord is left liable for outgoings on the property, including empty property business rates.

A landlord cannot forfeit for breach of covenant, other than for non-payment of rent, unless it first serves notice under section 146 of the Law of Property Act 1925 giving the tenant a reasonable time to remedy the breach, if it is one that is capable of remedy.

Tenants can seek relief from forfeiture from the court. If granted, this means the lease continues as if the forfeiture had never happened. Relief is at the court’s discretion. If granted it is usually subject to conditions, such as requiring any breaches to be remedied and any arrears to be paid.

Facts

BHS was tenant of a large unit at Cribbs Causeway shopping mall in Bristol pursuant to a lease granted in 1998 for 125 years. Only a peppercorn rent was payable, but BHS had paid an initial premium of over £7m and there were other ongoing payments such as service charge. As the fourth largest unit and a sub-anchor in the mall, BHS had covenanted to keep its shop open seven days a week (keep open covenant) and there was no tenant’s break clause.

Experiencing financial difficulties, BHS took out a loan from GB Europe Management Service Limited (GB) secured by a legal charge over the lease. However it entered into administration in April 2016 and began marketing the unit. The store closed in August 2016, putting BHS in breach of the keep open covenant. It went into liquidation in December 2016, changing its name to SHB Realisations Limited (SHB).

The landlord served a section 146 notice and later issued forfeiture proceedings in July 2017. SHB and GB sought relief from forfeiture and the landlord counterclaimed for possession and mesne profits (consideration for SHB’s continued occupation). SHB admitted that it could not cure its breach of the keep open covenant but sought relief to provide a further six months to find an assignee who could cure the breach. The landlord considered SHB had had sufficient time to do this already and wanted to recover possession to try to let the boarded-up unit to a new retailer, to retain customer attraction and footfall.

The judge at Bristol county court had to decide whether or not to grant SHB relief from forfeiture. This involved considering whether there was any real interest being shown by anyone in taking an assignment of the lease, what - if any -value the lease had and whether the landlord would receive a windfall if relief were refused.

Decision

The court concluded that whilst SHB’s breach of the keep open covenant was deliberate, it was not wilful. There was still a possibility of someone taking an assignment of the lease and this was the only way to remedy the breach. As to the lease’s value, on the evidence it appeared there was a market for it which meant it did have some value, which was at least £1m. The landlord would therefore receive a substantial windfall if relief were not granted. SHB should not be deprived of the opportunity to reduce its debts, nor GB be deprived of its security.

The court therefore granted relief from forfeiture, on condition that SHB complete an assignment of the lease within three months of the judgment being handed down and that it paid the ongoing sums due under the lease.

Comment

This case is useful in demonstrating that, even where it would result in a windfall to the landlord and significant loss to a lender, a lease can be forfeited for breach of a keep open covenant and that there are limits to the time that an insolvent tenant will be allowed to find an assignee to remedy such a breach.

Further information

SHB Realisations Ltd v Cribbs Causeway Nominee (1) Ltd