Breach of a Commercial Lease (What to Do!)

Both Landlords and tenants can be found in breach of a commercial lease under either the Law of Property Act 1925 or Landlord and Tenant Act 1954 if they fail to meet one of more of the lease covenants.

When a tenant has breached the terms of their commercial lease, landlords can respond through serving a Section 146 notice on a tenant/tenants. Should tenants fail to remedy their breach, either through reparations or meeting the breached term, they risk repercussions including the potential forfeiture of the lease.

When a landlord has breached the terms of their lease tenants can take legal action requiring the landlord to make repairs to the property, pay reparations, or potentially terminate the lease leaving them free to find preferable premises.

Although the law protects both tenants and landlords from breach of a commercial lease, there are a number of risks to both parties in the process of resolving the issue. Both landlords and tenants must be aware of their rights and responsibilities to ensure they avoid the negative repercussions of a breach of commercial lease.

 

Breach of a commercial lease: Common types of breach

 

The nature of the breach in question will largely determine the course of action and available remedies for the injured party.

 

Tenant breaches

 

Tenant breaches generally fall into one of two categories, “continuing breaches” and “one and for all” breaches.

Common examples of continuing breaches include:

 

a. Failure to keep the property insured

b. Failure to maintain or make repairs to the property

c. Unauthorised use of the property, for example residing in the property if that was not

d. expressly permitted in the lease agreement

e. Unlawful sharing of the property

 

a. Common examples of once and for all breaches include:

b. Failure to have repaired the property by a set date

c. Making unauthorised alterations to the property

d. Unauthorised assignment of the property

e. Unauthorised sub-letting of the property

 

Landlord breaches

The landlord’s obligations to the tenant should be clearly set out in the terms of the lease. Should the landlord fail to meet these obligations, or attempt to abuse their position regarding the property, they will have breached the commercial lease. Some of the more common examples of landlord breach of contract include:

 

a. Failing to repair the property in line with the lease terms

b. Failure to pay for insurance or services stipulated in the lease

c. Use of the property without the tenant’s consent and beyond any uses stipulated in the lease

d. Attempting to enter the premises without consent while it is occupied

e. Attempting to evict the tenant without just cause or without following due procedure

 

Depending on the specific terms of a lease there are a number of ways in which a landlord may breach the contract. Having a detailed and clearly worded lease is essential to avoiding disputes over landlord obligations. A legal advisor can help draft commercial lease agreements as well as advise whether there has been a breach.

 

What to do in the event of a breach of a commercial lease

 

Reference to the commercial lease documentation will be critical for both landlords and tenants in order to confirm whether a breach by either party has occurred.

Where a breach can be established, the first steps should be to start a dialogue with the other party to try to find an agreement to resolve the dispute. It benefits both parties if a lease breach can be resolved informally before the need for further, formal action is taken, particularly where the lease is ongoing.

Should these initial discussions fail, you may look to take more formal action.

 

Landlord remedies

 

A landlord for example may look to serve the tenant with a section 146 notice. This formal notice is a critical step as the landlord is unable to proceed with legal action unless a section 146 has been served.

The tenant would be given a reasonable time in which to remedy the breach. If they fail to do so within the time frame, or if the breach is something which cannot be remedied, the landlord has the right to forfeiture by applying to the court.

In most leases a clause will give the landlord the right to recover their costs from serving a notice on the tenant once forfeiture has been determined. Landlords should ensure that their lease contains such a clause prior to signing the tenant.

Forfeiting the lease also prevents the tenant from repeating the breach and relieved the landlord from the burden of an unreliable tenant. Once a lease has been forfeited, the tenant is able to apply to the courts for relief from forfeiture. If they fail to apply to the courts within 6 months the lease is terminated and the tenant has no further rights to use the property. The exception is in cases of forfeiture being effected through the landlord’s peaceable re-entry where there is no time restraint on the tenant to apply for relief.

The tenant must apply to the courts under section 146 of the Law of Property Act 1925 and may be required to provide evidence. The court will either grant relief or withhold relief. Tenants have the best chance for success if they have acted quickly to repair any breaches to the lease, paid any rent arrears, covered any costs incurred by the landlord due to the breach and apply for relief.

If the court grants relief the commercial lease will be reinstated with its’ original terms. Should the landlord and tenant manage to agree terms for the relief without going to court their agreement should give rise to a new tenancy which will automatically be protected by the Landlord and Tenant Act 1945. In the latter case, legal advice should be taken to ensure the new lease is suitable for both parties.

 

Tenant remedies

 

Tenants should again try to resolve the issue outside of the legal system through contacting the landlord, ideally by letter, regarding the breach and their expectations of the landlord to remedy it. A record of such communications should be kept in case they need to be used in evidence.

Should negotiations fail to resolve the breach, the tenant has a number of options primarily involving taking their landlord to court.

If the landlord’s breach is a failure to carry out repairs of maintenance, the tenant could apply to the court for an order for specific performance, forcing the landlord to carry out works on the property. Obtaining an order for specific performance will be reliant on the tenants’ ability to prove to the court that the works are urgent and any alternatives offered by the landlord are inadequate. Having sufficient evidence of the issue, it’s negative impact on the tenant and their business, and requests to the landlord to remedy the problem is critical to a successful case. Tenants should bear in mind the initial legal costs of a potential court case before committing to this course of action.

Tenants also have the ability to claim compensation from the landlord for financial losses caused by the landlord’s breach. There is no cap to damage claims a tenant can make against their landlord for disrepair where the landlord was obligated to maintain the property. Alternatively, the tenant and landlord could agree to offset the compensation against rent payments until the tenant has been remunerated. Tenants could also carry out repairs themselves and then try to recover the costs, within reason, from the landlord as part of a damages claim.

Again, evidence of how the issue has impacted on the tenant and their business, as well as the landlord’s awareness of the issue and continued negligence, will be critical to a successful case. Legal cases can be unreliable and having the guidance of a solicitor is strongly recommended.

If the landlords breach is sufficiently serious and beyond repair, tenant may be able to terminate the lease and leave the premises. This option is only possible where the breach has been particularly severe.

Usually the threat of legal action is enough to result in a landlord responding positively and meeting their obligations. Should the landlord continue to breach their commercial lease obligations acquiring legal assistance is recommended before a tenant begins court proceedings.

 

When the breach is failure to pay rent

 

When a tenant breaches a commercial lease through failing to pay rent the legal process differs from other types of breach.

In the case of rent arrears, the landlord can proceed with forfeiture not only through court proceedings but with the alternative option of peaceable re-entry. Peaceable re-entry is only permitted when the breach is failure to pay rent but provides a faster means of terminating a lease and incurs minimal costs. Peaceable re-entry usually involves changing the locks and taking over the property. The onus is then on the former tenant to apply to the courts for relief from forfeiture if they hope to get the property back. Peaceable re-entry can only take place when the property is empty of people and is not applicable in cases where the tenant also resides in the property.

Forfeiting the lease will not automatically remedy the late rent payment as it does not produce any money for the landlord in and of itself. However, forfeiting the tenant’s lease does prevent the tenant from continuing to breach their obligation to pay rent. Forfeiting also removes a burdensome, defaulting tenant from the property and allows the landlord to find a more reliable tenant.

If a forfeiture is final and the property contains possessions or trade goods a process known as Commercial Rent Arrears Recovery (CRAR) can permit the landlord to take the items against the money owed. A legal advisor should be consulted prior to attempting to hold goods against rent areas.

 

Risks in the tenant breach process

 

Adequacy of commercial lease

 

A key risk for both parties is where the lease omits critical clauses or fails to adequately cover certain types of dispute.

For example, for the landlord it is important that the lease gives the landlord the right to reclaim costs should they need to serve a notice, sets out clearly whether and on what terms the property can be assigned, sub-let, occupied etc, and what maintenance or repair responsibilities the tenant has.

For tenants it is important that they do not sign a lease which obligates them to undertake unreasonable responsibilities. It is recommended that both parties take legal advice when drafting a commercial lease in order to ensure they understand their obligations and are protected from a potential breach.

 

Landlords waiving rights

 

A concern for landlords is that they may waive their right to take action against a tenant in breach of their contract. Accepting rent after discovering a tenant’s breach of the terms of the commercial lease can amount to a waiver if the breach is not capable of remedy such as failing to repair the property by a set date. However, landlords are able to accept rent without risking a waiver in instances where the tenant is able to remedy their breach, for example failing to maintain the property.

In some circumstances a landlord may choose to waive a breach if they feel the breach is minor or can be resolved. However, landlords must be cautious when waiving a breach of commercial lease. Once a landlord has waived a once and for all breach they will lose the right to forfeit the lease of the tenant because of that specific breach. If a continuing breach is waived, the landlord’s right to take action against the tenant (removal of the waiver) is reinstated usually on a daily basis.

 

Following process requirements

 

In order for the tenant to be held in breach of a contract and be required to pay reparations or even forfeit the lease, the landlord must follow the legal process by submitting a 146 notice to the tenant.

For the 146 notice to be valid it must meet the formal requirements set out in the integrated drafting notes and have been adapted to fit the facts and circumstances of the case. Proof of the tenant’s receipt of the section 146 notice is critical and the documents should be delivered in duplicate with the tenant signing and returning the duplicate.

 

Use of forfeiture

 

The process of forfeiture can also result in disputes. The landlord must show suitable restraint if entering a property as part of peaceable re-entry, must not enter the property at a time when it is occupied or if it is used as a residence in addition to a business. Should the landlord use violence or enter the property while occupied they are liable for criminal activity.

 

When and Why to seek legal advice

 

The law surrounding breach of commercial leases is complicated and the repercussions of a commercial breach when poorly handled can be negative for both parties.

Legal advice can help to achieve early resolution and support where a dispute requires legal action.

 

Legal disclaimer

 

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.