The Court of Appeal has considered the correct approach to granting relief from forfeiture where a tenant had wilfully granted an underlease in breach of the terms of its lease. In this case it was significant that the lease had a capital value.

The court held that:

• Relief could still be granted even where a breach had been deliberate, and that exceptional circumstances did not need to be shown;
• The advantage that the landlord would gain from forfeiture should be taken into account. This lease was of high value with a considerable period left to run. If the lease was forfeited, the landlord would gain a windfall of between £1 million and £2 million;
• By way of compromise, the court granted relief from forfeiture on condition that the tenant transfer the lease to a new tenant within six months.

In relief from forfeiture applications the court will try to strike a balance. In this case the Court recognised that there will be some cases where it refuses relief from forfeiture, despite the fact that the landlord benefits from a windfall, if there is no other way of compelling the tenant to comply with the covenants in the lease.

Relief from forfeiture

A tenant can apply for relief from forfeiture after a landlord has exercised its right to forfeit the lease. The court has a wide discretion whether to grant relief from forfeiture. Generally, the court will grant relief if both of the following conditions are satisfied:

•  The tenant remedies the breach, or pays compensation in respect of breaches which cannot be remedied; and
• The court is convinced that the tenant will perform its obligations under the lease in the future.

When exercising its discretion, the court will take into account the tenant's conduct, the nature and gravity of the breach and its relationship to the value of the property. The court may grant relief to a tenant on such conditions as it thinks fit in the circumstances.

Facts of the case

In this case F was the tenant under a lease for seven commercial units. F was aware that it needed the landlord’s consent to underlet the property. Despite this, F underlet the property which was used as a restaurant.

The restaurant caused nuisance and annoyance to surrounding properties and the landlord faced many complaints. The landlord forfeited the lease. F applied to the court for relief from forfeiture on such terms and conditions as the court thought fit.

The Court refused relief from forfeiture on the grounds that F had deliberately breached the lease. As the lease was of high value with a considerable period left to run, the decision meant that the landlord gained a windfall of between £1 million and £2 million.

F re-applied to the Court for relief from forfeiture. The fresh application for relief was made on a new basis, namely that the court grant relief on condition that F had to complete the sale and assignment of the lease within six months, failing which it would surrender the lease. F proposed this as a compromise. F submitted that it was unjust for the landlord to gain such a significant windfall if the lease were forfeited. The Court again refused to grant relief.

F appealed and asked the Court of Appeal to consider whether the judge had taken the correct approach. F’s position was that, where there was a wilful breach, the tenant did not have to demonstrate that there were exceptional circumstances for the court to grant relief. F also argued that the judge had failed to take proper account of the value of the lease. The Court of Appeal allowed F's appeal holding that relief could still be granted even where a breach had been deliberate and that special circumstances did not need to be shown. The court held that the value of the leasehold interest was also relevant, although it was not enough simply to find that the effect of a forfeiture would create a windfall for the landlord.

The Court of Appeal considered that the judge had failed to consider the possibility of F assigning its lease on suitable terms and such compromises should be considered in full as part of the balancing exercise.

F was granted relief from forfeiture for the purposes of, and conditional upon, the assignment of the lease within six months. The landlord was not entitled to control the marketing and sale of the lease. However, the assignment to the proposed purchaser would be subject to the landlord’s prior consent which was not to be unreasonably withheld.

Comment

This case highlights the court’s attitude to tenants with valuable leases who find themselves in a precarious position. In reality, most tenants with valuable leases would probably wish to avoid running the risk of their leases being forfeited and will take particular care in observing their covenants in order to safeguard the asset.

Case: Freifeld and another v West Kensington Court Ltd