Tue, 25 Apr 2023
The case of Chug v. Dhaliwal provides an instructive High Court example of when and how a Judge must weigh up factors for relief from forfeiture, and why it is a bad idea to unlawfully sublet commercial premises.
In summary, the case tells property practitioners that:
- There is some latitude for imprecise section 146 notices where the situation ‘on the ground’ has been deliberately obscured by the tenant and the tenant knew the substance of what was being required of him;
- Agreements which compromise potential dilapidations claims on the ground that no point is taken about unlawful forfeiture will often prevent a successful claim for relief from forfeiture;
- Alienation and unauthorised subletting are continuing breaches on which the landlord’s right to forfeit, subject to notice, arises each day that it continues.
Mr Chug was a tenant of Mr Dhaliwal of a commercial property in Hounslow. He had the benefit of a 20-year lease at a rent of £57,000 per annum. The lease contained the usual covenants about not subletting or parting with possession, not altering the layout of the property, and paying the rent on time. During the lifetime of the lease Mr Chug tried to sell his business. He entered discussions with a third party, Mr Darwan. Initially, Mr Chug sought to do that which he was required to do by the lease, namely obtain permission to assign the lease to Mr Darwan, but nothing came of it. Mr Chugg gave Mr Darwan his business anyway, receiving £175,000 for it and Mr Darwan took over the shop. Mr Darwan paid Mr Chugg the rent every month and then Mr Chug passed that on to the freeholder, Mr Dhaliwal. Mr Dhaliwal had no idea that this subletting of the property had taken place.
In 2019, Mr Dhaliwal became aware of the subletting arrangement when he was attempting to secure a loan against the property and the surveyor sent round by the bank noticed what was going on. It was also just before this that the rent was not paid in full for the first time and an issue arose as to whether there had been an unlawful alteration to the shop. However, even though Mr Dhaliwal was aware of this, he continued accepting rent on another four occasions.
Eventually, Mr Dhaliwal served a Section 146 Notice on Mr Chug and said that there were three breaches of the lease which needed to be remedied otherwise the lease would be forfeit. Those were the breach of the alteration clause, the breach of the subletting clause and the shortfall in rent. Because there was no response to the Section 146 Notice, Mr Dhaliwal re-entered the premises using bailiffs and Mr Darwan was excluded. Mr Chug now got involved and sent a letter to Mr Dhaliwal saying that he would put the property back in the state it was at the time of the lease. He said that he would and had repaid the rent arrears and that he would organise for Mr Darwan to take over the lease legitimately. However, even though there was a brief re-entry into the property, eventually Mr Dhaliwal did finally obtain absolute possession again.
Mr Chug and Mr Darwan brought an action for a declaration that the re-entry effected on 5th July 2019 was unlawful, or alternatively, relief from forfeiture under the well-known jurisdiction of the County Court. All those claims were dismissed by the Judge and Mr Chug and Mr Darwan appealed. They appealed on three grounds: firstly, that there had been no breaches of the lease at the time that Mr Dhaliwal instructed the bailiffs to re-enter the property and, if this was right, then it would mean that the forfeiture was unlawful. Their argument was that the alterations that had been made were not ones that require consent; that although there had been a shortfall in rent, the resultant right to forfeit based on that had been waived because Mr Dhaliwal had accepted rent after that date; and most importantly, that even though Mr Chug was in breach of the lease by subletting the property without consent, Mr Dhaliwal had waived his right to forfeit because he had accepted rent after knowing that the situation was as it was. There was also a complaint that the Section 146 Notice that had been served was not sufficiently precise and finally, that the Judge had failed to properly exercise his discretion as to whether to grant relief from forfeiture.
The Decision on Appeal
As a factual matter, the High Court found that the county court’s decision and finding of fact that Mr Chug had accepted forfeiture meant that he could not now bring a claim for relief from forfeiture. There had been an agreement between the original landlord and tenant that if Mr Chug did not have to make good any of the alterations that had been made to the property then Mr Dhaliwal would not pursue him for arrears of rent and therefore matters would be brought to an end. The Judge’s factual findings on this had also been that all parties had been trying to negotiate a new lease which in the end had not come to pass, therefore showing that all parties were of a view that the old lease had come to an end.
More importantly for property practitioners, though, is the fact that the Judge on appeal found that the acceptance of rent, even after the landlord was aware of the breaches of the lease, did not waive the right to forfeit in this instance. That was because of a well-known principle which is that when a landlord becomes aware of a breach of a lease such that would give rise to the right to forfeit, she is put to her election. That is, she must either terminate the lease or elect to have it continue and she can do that by treating it as if it is continuing. The classic example of this is a landlord who demands or accepts rent after being aware of arrears of rent. If that happens, the landlord cannot then forfeit the lease for non-payment of rent and must collect the arrears in other ways.
The Judge explained this point in this way. There is a difference between once and for all breaches and continuing breaches. A once and for all breach might be the non-payment of rent which is concluded the moment the rent is not paid on the due date and therefore, a landlord faced with a once and for all breach has, in essence, a once and for all opportunity to forfeit or to treat the lease as continuing. However, for a continuing breach, the breach arises afresh each day and the example in this case was the unlawful subletting. So long as Mr Darwan was in the property without the permission of Mr Dhaliwal there was a continuing breach of the lease which gave rise to a fresh ground of action for forfeiture each day. That meant that accepting a rent did nothing to that point. The Judge gave a useful summary of how one determines whether something is a once and for all breach as follows:
“Deciding whether there is a once and for all breach, to my mind, involves looking at the character of the obligation in question and deciding how a breach occurs. If it involves paying rent on a particular day then the breach is complete once and for all if the date comes and goes and the rent is not paid. But, if it involves agreeing not to suffer someone else’s occupation without the landlord’s consent it seems to me that there is a new breach each day when the unlawful occupation is tolerated by the tenant choosing not to do anything about it.”
That provides a useful summary and guide for lawyers advising landlords and tenants on forfeiture.
The judge then considered the section 146 point. The Claimant in this case said that the Notice was not adequate and did not give details that were necessary for the tenant to understand what he needed to do to avoid being in breach of the lease. The Judge gave this short shrift, in essence, finding that a reasonable person in the position of Mr Chug would have understood the Section 146 Notice and a reasonable person would have understood they were being told now to formalise the informal and, indeed, secret arrangement that they had entered. This is a cautionary tale for lawyers advising tenants who take to technical points in objection to a 146 Notice. There was a clever point run by the Claimant’s lawyers in this case, that because the Section 146 Notice referred to a licence and not a sublease, it was inaccurate. However, as the Judge adroitly found, the landlord was in a difficult position here because the exact nature of the unlawful subletting was being kept from him deliberately and therefore, he can hardly be criticised for not knowing the precise nature of the secret arrangements. As the Judge put it, Mr Dhaliwal was taking a stab in the dark but he had to because Mr Chug kept him in the dark.
There was a final point about relief from forfeiture and the exercise of that discretion. In this case, the Judge at first instance was a little unclear because he found, initially, that he did not have any jurisdiction to grant relief from forfeiture because Mr Chug had waived any right to bring such a claim. However, the Judge then went on to consider his discretion, when he should not have done so. The High Court determined that this did not undermine the judge’s reasoning and the appeal was dismissed.
Therefore, this useful case restates some principles of property law for the lawyer advising tenants and landlords in the commercial sphere and provides a cautionary tale against subletting a commercial property without obtaining permission from the landlord.