• 02 JUN 17
    Forfeiting commercial property leases: the benefits and limitations

    Forfeiting commercial property leases: the benefits and limitations

    Commercial property dispute resolution specialist Eleanor Cornthwaite gives an overview of forfeiture and explores the pros and cons.

    What is forfeiture?

    Forfeiture is a tool available to commercial landlords to protect their interest in their property, following the tenant breaching its lease

    Many commercial property leases contain a forfeiture clause which enables the landlord to re -enter and obtain possession of their property, thereby bringing the lease to an end. This can be exercised either by peaceable re-entry or by issuing court proceedings.

    Why is it beneficial?

    Forfeiture or re-entry, is a useful tool for landlords who want to protect their interest in the property and obtain possession when a tenant breaches the lease or becomes insolvent.

    The property may be made available for redevelopment, be re-let at a higher rent in a buoyant market, or a landlord may simply be able to rid him/herself of a problem tenant.

    Considerations

    It may not make commercial sense for a landlord to forfeit. If the market is poor, it may be difficult to secure a new tenant. The landlord would lose rental stream from the point of forfeiture and a vacant property will not yield rental income.

    Once possession is re-taken, the landlord will be liable for payment of insurance, utilities and business rates too, although empty rates relief may be available.

    There is also a risk that squatters may move in to empty property. Landlords should ensure that extra security measures are put in place, however these can be costly.

    Once a lease has been forfeited, landlords become involuntary bailiees of any goods left at the premises. These goods belong to the former tenant and the landlord has a duty not to cause reckless or deliberately damage to them. In these cases, tenants should be served statutory notices to collect their belongings.

    The implications of becoming a bailee can result in significant practical difficulties for landlords, particularly if the goods are hefty. Storage costs may also be incurred and the landlord may not be able to recover these from the former tenant.

    In addition, there are restrictions on a landlord’s ability to sell and retain the sale proceeds. Generally speaking, any proceeds of sale would be held on trust for the former tenant.

    Forfeiture can be a useful tool but is not without its difficulties. Landlords may want to consider options other than forfeiture, such as drawing down on rent deposits, exercising self-help provisions, in cases of disrepair, or potentially calling upon guarantors or original tenants, particularly in cases where the market is poor.

    For more information on forfeiture or advice on any commercial property dispute, contact Eleanor Cornthwaite on 0161 761 4611 or email her at eleanor.cornthwaite@whnsolicitors.co.uk