In January 2004 the Law Commission published a consultation paper on the reform of the law of forfeiture. Forfeiture can take several forms, but basically refers to the ability of a landlord to terminate a lease or right of occupation before its contractual expiry date, on the grounds that the tenant has broken or failed to perform its obligations. The argument put forward by the Law Commission for the reform of this law was that, as it stands, the law on forfeiture "is complex, lacks coherence and can lead to injustice". The initial proposals put forward in the consultation paper envisaged replacement of the current law with a statutory scheme.
Problems with the current law
The Law Commission published the conclusions of the consultation paper in its recent report "Termination of Tenancies for Default". This report confirms the initial view of the commission, and includes a draft bill for the proposed statutory scheme. The report identified the problems with the current law, including several headline issues:
- The present law is based on the concept of re-entry – the principle that a landlord could physically take possession of a property and exclude a tenant, who would have little or no prospect of taking back the property. This is outmoded and will be abolished;
- There is unnecessary extensive wording in tenancy agreements as a result of the requirement for specific provisions to enable the landlord to forfeit in the event of a tenant's breach;
- It is not always clear on what basis a court might grant relief from forfeiture and restore the tenant's right of occupation, and tenants are in exceptional cases barred by statute from any claim for relief;
- The law concerning formal demands for rent is obsolete;
- It is presently possible for a tenant to remedy a breach and prevent the landlord from ending the tenancy, even if the tenant has been a persistent defaulter – the Law Commission highlighted difficulties landlords face with persistent late payers;
- On the other hand, some breaches, deemed historically to be more serious, are deemed not capable of remedy and so the landlord can forfeit at any time;
- In general, the rules concerning sub-tenants, mortgagees and others holding derivative interest in the tenancy provide insufficient protection on those parties. This can prejudice either those parties or a landlord if one such party makes a late application for relief.
Proposals for a new statutory scheme
The statutory scheme proposed by the Law Commission introduces a number of important amendments to the current law. The response to the Law Commission's consultation was positive and supports an overhaul of the current law. However, the Government has yet to indicate either the extent to which it would like to adopt the Law Commission's recommendations or a timetable within which the necessary legislation may be passed. If the draft bill is enacted it will only be possible to terminate a tenancy on the grounds of a breach of covenant where that breach is a "tenant default" and then only by means of a "termination action".
Any breach by the tenant of any obligations owed to the landlord will be a tenant default. This extends to a breach of any condition, agreement or term including those implied or imposed by common law or statute. It will also include a breach of covenant by a previous tenant (where there has been an unlawful assignment), or a breach of covenant by a person who has agreed to guarantee the tenant's obligations under the tenancy. Breach of covenant is also broadly defined to include circumstances where the tenancy automatically terminates on the occurrence, or the non-occurrence, of a particular event, which is attributable to the tenant's conduct. The example given in the report is that where the agreement provides that the tenancy terminates on the tenant's insolvency. This will operate as a breach of covenant engaging the operation of this scheme.
A termination action will be where the landlord either makes a termination claim or uses the summary termination procedure. These are distinct methods of terminating a tenancy and cannot be used concurrently in relation to the same tenant default. The landlord must select which is the more suitable course of action, in either case serving a notice on the tenant before taking action. In taking a termination action, the landlord must act in accordance with the provisions of the statutory scheme. A termination action which does not comply with the scheme provisions will have no effect. There will be a prescribed form of default notice, which is to be served by the landlord within a limited period following the default, the primary aim of which is to ensure that the tenant complies with its obligations.
Failure to remedy the breach will lead to the termination claim procedure and a range of possible orders can be made by a court. The statutory scheme will also provide for a summary termination procedure, which can be used in a situation where the tenant has no realistic prospects of resisting a termination order or where the property has been abandoned. When a tenancy is terminated under the scheme all interests derived out of it will end at the same time. The scheme provides that holders of a derivative interest may respond to the landlord's termination action whether or not the tenant has done so and seek an order protecting their interests from the court.
In effect once the statutory scheme comes into force there will no longer be any need for a landlord to reserve a right of re-entry in a tenancy agreement. A landlord's right to take termination action under the scheme will be a statutory right. It is, however, important that the tenants are fully informed of the potential consequences of failing to comply with their obligations. A tenant will therefore be entitled to be given an explanatory statement, which sets out the landlord's rights to take termination action in the event of a tenant default. As a general rule, failure to comply with the notice requirements under the scheme will prevent the landlord from making a termination claim. The court may however, where it is just and equitable to do so, dispense with the need to serve a tenant default notice or any of the other requirements relating to the contents of a notice.
Although, in every case, a landlord's claim will be for a termination order, the landlord may be content with some other order that deals effectively with tenant default. A range of orders will be available once the court is satisfied that a relevant tenant default has in fact occurred. These will include a termination order; an order that the tenant remedy the breach; an order for sale of the tenancy; an order to transfer the tenancy to the applicant or a third party; a new tenancy order; and a joint tenancy adjustment order, enabling one tenant to continue an action if another does not wish to do so.
A quick summary of the scheme
The new scheme introduces the new concept of tenant default. Landlords will have to provide an explanatory statement to the tenant before the lease has been granted, outlining what may happen to the tenant as a consequence of a tenant default. However, there will be scope within the statutory scheme for the landlord and tenant to agree that a breach of specified covenants will not give rise to an act of tenant default, and so to limit the effect of the scheme contractually through the tenancy agreement. The proposed scheme will abolish the current need for a right of re-entry and forfeiture to be specifically included in the lease. It will also abolish the ability for a landlord to waive a breach and any distinction between covenants to pay rent and other covenants. The current law of peaceable re-entry will also be abolished.
While the new scheme will rely on a court based system, it is intended that the reforms will encourage the parties to exchange information and negotiate an early settlement. The report emphasises the Commission's desire to ensure a level playing field between the parties by removing peculiarities, which have evolved under the current system and operate to the detriment of one party. However, it remains to be seen when and where there will be room in the legislative timetable for this draft bill to be considered.
The Law Commission Report on Termination of Tenancies for Default is available from the website of the Law Commission at: www.lawcom.gov.uk/docs/lc303.pdf