Hitting the Forfeiture Jackpot
The landlord in the case of Freifeld –v- West Kensington Court Limited could hardly believe its luck.
The landlord was faced with a situation where its tenant had breached its lease by underletting the premises in deliberate breach of covenant. The landlord therefore forfeited the lease. Desperate to try to continue trading, the tenant applied to the County Court for relief from forfeiture. The County Court did not waste much time in refusing to grant relief and made it clear that it was not impressed with the way that the tenant had demonstrated a cynical disregard for its contractual obligations. The tenant was sent off with its tail between its legs.
Because the lease was of high value with a considerable period left to run, the landlord was faced with an unexpected windfall of between £1 million and £2 million.
At this point, the landlord was rubbing its hands with delight. The problem tenant removed. And a chance to re-let the premises and to profit from the previous tenant’s loss.
The tenant however refused to give up the fight. It applied once again to the County Court for relief from forfeiture but this time on the basis that if it was granted relief, the tenant would agree to complete a sale and assignment of the lease within 6 months, failing which it would surrender the lease. The tenant argued that it was unjust for the landlord to gain such a significant windfall as a result of the forfeiture.
The County Court once again kicked the tenant out of court and refused to grant relief.
Having clearly decided to fight to the bitter end, the tenant appealed to the Court of Appeal for relief from forfeiture. It was in the Court of Appeal that the landlord suddenly stopped rubbing its hands with delight.
The appeal Judges decided that the landlord had not in fact been irreparably damaged by the tenant’s breach of covenant and that the value of the leasehold interest was so substantial that the ‘windfall factor’ needed to be taken into account. The Judges took the view that they were required to consider the financial advantage that the landlord would gain from the forfeiture of the lease and that it was necessary to consider whether forfeiture was a proportionate response.
Having carried out that analysis, the Court of Appeal decided that it was appropriate for the tenant to be granted relief from forfeiture. However, the Court did impose various conditions, no doubt to try and placate the distraught landlord. The Court ordered that relief would be granted on the condition that the lease was to be assigned within six months. The landlord was not given the right to control the marketing and sale of the lease but the assignment to the proposed purchaser was to be subject to the landlord’s prior consent (not to be unreasonably withheld).
The case highlights that the Court will carry out a balancing exercise when deciding whether to grant relief from forfeiture. It is important to remember that the Court has a discretion to impose whatever conditions it thinks fit when granting relief. A condition requiring a tenant to assign its lease is just one example of how that discretion can be exercised in a creative manner that weighs up the interests of both the landlord and the tenant.