Demand for Rent Does Not Waive the Right to Forfeit
The Court of Appeal has now confirmed that a demand for rent does not waive the right to forfeit
It has was previously accepted by the courts that a demand for and acceptance of rent is, as a matter of law, a waiver of the landlords right of forfeit a commercial lease agreement.
However, in a landmark decision welcomed by commercial landlords, the Court of Appeal has confirmed that a demand for rent does not waive the right to forfeit the lease.
This was recently considered by the Court of Appeal in the case of Faiz v Burnley Borough Council  EWCA Civ 55, handed down on 22 January 2021.
The relevant particulars are as follows:
- The first Claimant (C1) and second Claimant leaseholders (C2) and their sub-tenant, the third Claimant (C3), sought declaratory relief regarding their rights in cafe forming part of a historic country house in Lancashire (the property).
- The Defendant (D), a local authority, was the freeholder of the property and head-landlord to C1 and C2 as head-lessees. The lease commenced on 26 February 2010 and was for a period of 10 years, expiring on 25 February 2020 (the Lease).
- The Lease contained provisions restricting assignments and sub-letting and had a proviso for re-entry on breach (the forfeiture clause). It also contained a clause excluding 1954 Act security of tenure.
- C1 and C2 had breached the Lease by entering into a sub-lease of the property with C3;
- The Cs’ solicitors wrote to D on 18 October 2019 alerting D to the sub-lease and advising that C3 had security of tenure under the same – C3 having a subsisting right to occupy the property upon expiry of the Lease.
- On 30 October 2019 D served a section 146 notice on C1 and C2 providing notice of forfeiture on the basis of C1 and C2’s breach by subletting the property. The breach was stated to be incapable of remedy. on 22 November 2019, D had peaceably re-entered and forfeited the Lease.
- One of the issues for determination by HHJ Halliwell was whether D had lost the right to forfeit by the time D had purported to exercise the right of forfeiture, because D had (allegedly) earlier waived its right to forfeit the Lease by previous actions;
- Those previous actions were: (1) by demanding and accepting rent after they had become aware that C3 was in occupation; and (2) D submitting its invoice for the revised sum of £1,826.87 in respect of insurance rent (the revision foreshortened the period, just to 18 October 2019). Prior to 18 October 2019, that is, on 26 September 2019, D had invoiced C1 and C2 for insurance rent for the period until 25 February 2020. After receipt of 18 October 2019 letter, D had been concerned that this would now amount to a waiver of their right to forfeit – being a demand for rent after the period when D became aware of the breach, and so issued a further (second) invoice for insurance rent on 4 November 2019, but for the period until 18 October 2019 (namely the date D said they became aware of the breach).
- Cs had paid this second invoice on 11 November 2019.
- As a consequence, these proceedings were brought.
- The date of D’s knowledge of the existence of the sub-lease was an important consideration for the Court, so as to ascertain whether their subsequent actions amounted to a waiver.
Lord Lewison gave the leading judgement which both Lady Justice Asplin and Lord Justice Arnold agreed with.
Lord Lewison stated at paragraph 15 and 16:
“The basic principle is not in doubt. Where a tenant commits a breach of covenant which gives rise to the right to forfeit the lease, the landlord is put to his election. Either he may forfeit the lease; or he may affirm its continuation. In order for the landlord to be put in that position he must have knowledge of at least the basic facts which constitute the relevant breach…”
“It is well-settled, for example, that distraining for rent with knowledge of a breach amounts to a waiver of forfeiture down to the date of the distress. That is because the right to distrain is a right which (until recent statutory changes) can be exercised only during a subsisting landlord/tenant relationship. It is also well-settled that the acceptance of rent which accrued due after the date on which the landlord had knowledge of the breach also amounts to a waiver. Where the alleged act of waiver is the acceptance of rent, and possibly where it is no more than a demand for rent, that is all that counts. Where the alleged act of waiver is something else, the court may look at all the circumstances of the case: Expert Clothing Service & Sales Ltd v Hillgate House Ltd  Ch 340.”
At paragraph 36 Lord Lewison stated:
“In Matthews v Smallwood  1 Ch 777 Parker J put it this way (in a passage that has been frequently approved):
“Waiver of a right of re-entry can only occur where the lessor, with knowledge of the facts upon which his right to re-enter arises, does some unequivocal act recognizing the continued existence of the lease. It is not enough that he should do the act which recognizes, or appears to recognize, the continued existence of the lease, unless, at the time when the act is done, he has knowledge of the facts under which, or from which, his right of entry arose. Therefore we get the principle that, though an act of waiver operates with regard to all known breaches, it does not operate with regard to breaches which were unknown to the lessor at the time when the act took place.”
And at Lord Lewison stated at paragraph 37:
“Thus the principle is that waiver takes place where the landlord demands or accepts rent which accrued due after the date of a breach known to the landlord. Where the breach consists of an unlawful sub-letting (as in this case), I consider that the landlord must know not only that the sub-letting has taken place, but also that the rent demanded or accepted accrued due after the date of the breach.”
The courts decision in simpler terms is that the demand for rent after a breach of a covenant made by the tenant is not a waiver of the right to forfeit the lease, provided that the demand itself was not made after becoming aware of the facts of the breach.
- The Court found that the landlord had knowledge of C3’s occupation since January 2018, as they had been receiving rental payments from C3 since before they were notified of the existence of the sub-lease by the Cs’ solicitors, nonetheless they had not been advised of the sub-lease (as distinct from mere occupation) by C1 and C2 at that stage and there was no reason why C3 could not have been occupying the property as a licensee.
- The Court thus rejected the submission that there had been a waiver earlier than 18 October 2019 by receipt of rental payments, as D had no notice of any material change in circumstances, or that a sub-tenancy had been granted before this date so as to activate any waiver.
- The argument that issuing a second invoice, for a revised insurance rent up to 18 October 2019, somehow amounted to a waiver, was also rejected by the Court. D’s intention in issuing the subsequent invoice was to restrict its demand for insurance rent to the period up until they first had knowledge of the breach / sub-letting, which the Court had found was 18 October 2019. The revised invoice was a recalculation on that basis, not a fresh demand for rent, therefore it could not be regarded as a waiver of D’s right to forfeit.
- Consequently, the Court found that the right to forfeit had not been waived, and so dismissed Cs claim for a declaration that a waiver had occurred.
In summary, at the time of the landlords impugned rental demand, the landlord was deemed not to have knowledge of the breach, so the landlords’ actions were not regarded as a waiver. The second invoice, even if construed as a demand for insurance rent at a time when the landlord had knowledge of the breach, was only for insurance rent for the period up to the point of knowledge of the breach, so likewise would not be regarded as a waiver of the landlords right to forfeit.
As will be evident from the Court’s judgment, the vital point in cases of this nature is the extent of the Landlord’s knowledge at the time a demand for rent (insurance or other type of rent) is made and whether the Landlord’s actions are consistent only with the continuation of the Lease.