Waiving Forfieture: How to identify rent payments versus arrears

Mon, 05 Dec 2022

1. As many landlords learn to their cost, it is very easy to waive the right to forfeit a commercial lease. Normally, waiver is inadvertently achieved by the landlord treating the lease as continuing once the right to forfeit has arisen; in legal language, the landlord must, knowing she has the right to forfeit, do some unequivocal act recognising the continued existence of the lease. There are many ways in which a landlord can treat a lease as continuing. These include, but this is not an exhaustive list;

a. Issuing a claim and suing for damages under the lease;

b. Suing for protection under the tenant’s building insurance policy[1];

c. Serving a notice that the landlord wishes to enter to carry out repairs;

d. Offering to buy the tenant’s interest in the lease;

e. Permitting the tenant to spend money improving the premises; and, most usually,

f. Demanding and/or accepting rent.

Simple cases

2. A landlord should first check their lease. The right to forfeit is a contractual one, and must be expressly included in the lease. The right is often expressed as a provision that, provided the rent remains unpaid for at least 14/21/or some other number of days, the landlord may reenter the premises and forfeit the lease.

3. Of course, it is important to know when the rent was due so that the landlord knows that the right to forfeit has arisen.

4. Where a tenant is up to date with the rent payments and then, as a one off, misses a rent payment and the grace period thereafter has expired, the landlord may be able to safely forfeit the lease if she has not accepted rent.

5. Further, where a tenant in arrears misses a rent payment and, after the right to forfeit sends a cheque the landlord, for the arrears and for the current rent, the landlord does not waive the right to forfeit if she cashes the cheque, retains the money for the arrears, but returns the money for the current rent to the tenant.[2] If the landlord does not cash the cheque, she is very unlikely to be considered to have waived forfeiture.

BACS

6. Increasingly, rent is paid by BACS transfer. A landlord who receives money by bank transfer and does not return it very promptly has been held to have waived the right to forfeiture.

7. From a tenant’s perspective, if they send rent by BACS and put as a reference that the money is for the current rent or August’s rent (for example) it is difficult for the landlord to argue that these monies were not for the current rent, and therefore forfeiture had been waived.

The more complicated and usual situation

8. A more usual and complicated situation is this. A tenant has several thousand pounds of arrears, and these have been incurred over many months. The tenant pays all the rent in Q1, misses Q2 and Q3, and then overpays in Q4 by £1000.00. Accordingly the arrears are £4,000.00. and the landlord has forfeited the lease for these arrears. In such cases, the Claimant may bring a claim for an injunction and damages for unlawful forfeiture.

9. The tenant’s case is that the overpayment in Q4 was for the rent plus some arrears, and therefore the acceptance of rent waived forfeiture; the landlord’s case is that the money received in Q4 was for arrears only and accordingly was credited against the amounts owing from Q2 and Q3. Therefore the right to forfeit was not waived.

The law

10. The law of debt and election becomes relevant. Where there are arrears of rent and rent due from a tenant, and the money is not identified as being either rent or arrears, a landlord is entitled to assign the money against the arrears, starting with the oldest first.[3] This means that the money paid in Q4, even if paid on the day that the rent was due, could be assigned by the landlord to arrears. This is serious matter for tenants, who may be in debt and struggling to pay what they consider to be the rent, but then find the lease forfeit anyway because the landlord says the rent has not been paid.

A simple solution

11. A tenant faced with this situation should ensure that they have properly identified the purpose of the money. Whether this is by covering letter with the cheque, by email sent shortly before the money transfer and/or by noting the purpose of the funds on the BACS transfer.

12. A landlord can return the money and/or write to the tenant and say that they are ascribing the money to the arrears. However, accepting a penny over what is due in arrears, will constitute accepting current rent, with the associated waiver of forfeiture.

Unlawful forfeiture

13. The simple labelling of a BACS transfer can avoid much factual ambiguity and, perhaps more importantly, can avoid a claim for unlawful forfeiture, which all the consequences of that. In short, tenants should make it clear they are paying the current rent and not the arrears; landlord should ensure they only keep money which is due for arrears, and return immediately any over payment.

[1] Cardigan Properties v Consolidated Property Investments [1991] 1 E.G.L.R. 64

[2] Seahive Investments Ltd v Osibanjo [2008] EWCA Civ. 1282

[3] Thomas v Ken Thomas [2006] EWCA Civ 1504

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