Company wins appeal over £1m forfeiture of lease despite failings

A company has won its appeal against the forfeiture of its head lease, which could have resulted in losses of more than £1m.

The issue arose because the company had breached the terms of its lease relating to seven commercial units by sub-letting one to a restaurant without getting the consent of the landlord. The restaurant created a nuisance to surrounding properties and the landlord faced numerous complaints.

The landlord took legal action. The judge found that the company had demonstrated a cynical disregard of its obligations and ordered that the lease should be forfeited. This meant the landlord would gain a windfall of more than £1m.

The case went to the Court of Appeal, which overturned the judge’s decision even though the company admitted under cross-examination that the breach had been deliberate.

The Appeal judges held that the court should not exercise its discretion to enable a landlord to take advantage of a breach by which he had not been irreparably damaged.

The judge at the original hearing had taken the view that the company was reaping what it had sown, but that left out of the account the advantage that the landlord would gain from forfeiture.

The Court of Appeal therefore granted relief from forfeiture on condition that the head lease was sold within six months and the units were properly managed in the meantime.

The landlord was not entitled to control over the marketing and sale of the lease, nor to a right of prior approval of the purchaser.

The court said its decision should not be misinterpreted as conferring carte blanche on tenants to disregard their covenants wherever there was value in their leasehold interest. In every case a balance would have to be struck and there might well be cases where even substantial value had to be passed to the landlord if no other way of securing the performance of the tenant’s covenants could be found.

Please contact Janice Young if you would like more information about the issues raised in this article or any aspect of commercial property law.