Seminar Notes 24.10.07 Francis Collaço Moraes

2 Gray's Inn Square Chambers

Seminar Notes 24.10.07 - Francis Collaço Moraes

Home

Contact

Seminar Notes

These notes were prepared by Francis Collaço Moraes and form part of the seminar Termination of Tenancies for Tenant Default given on 24th October 2007 by the 2 Gray's Inn Square Chambers Property & Commercial Group.

Francis Collaço Moraes

Index

Termination of Tenancies for Tenant Default

Rationale for reform

The defects of the current law

•

Principal culprit is the doctrine of re-entry. Its effects are both adverse and pervasive. The tenant is relieved of obligations until possession is obtained (the tenancy ends on forfeiture). If forfeiture is by physical re-entry, unless the tenant applies for relief, the landlord will probably taking steps to re-let the premises to a new tenant or to sell their reversion with vacant possession.

•

The current system requiring service of a notice on the tenant (under section 146 of the LPA) only where the covenant broken is a “non-rent” covenant is not sufficiently comprehensive.

•

It is not only the tenant who suffers from forfeiture. There are others who stand to lose if the tenancy falls in: those holding interests derived out of the tenancy, such as sub-tenants, mortgagees, chargees and others. They have no right to receive notice of the claim for forfeiture under the current law.

•

The doctrine of waiver. Waiver is a trap for the unwary – whether they are landlords, or their lawyers.

The aims of the New Scheme

•

The guiding principle is ‘proportionality and necessity’

•

Simplification and modernisation of the law.

•

To make the law more transparent.

Index

Key features

Tenant default

•

New concept: “tenant default”

Tenant default notice

•

Section 146 notices abolished

•

Replaced by “tenant default notice” or “summary termination notice”

Termination action – Two forms

Either

Summary termination procedure

•

To provide a form procedure equivalent to peaceable re-entry (but on notice) in limited circumstances (where tenant would have no realistic prospect of resisting a termination order or where premises abandoned)

•

It is a notice-based procedure.

Termination Claim

•

Court-based procedure

New orders

•

On proving tenant default Court can make any order it thinks fit

•

The Bill lists SIX possible orders

Termination order: ends the tenancy and any interests deriving out of it on a date to be specified (clause 12). Note: If landlord wants possession, a possession order will have to be sought in addition.

Remedial order: sets out what the tenant must do to remedy the default and the date by which it must be remedied – this is not a suspended termination order (tenancy continues, e.g. claim stayed for 3 months from the day by which the tenant is required to remedy, landlord can apply to lift the stay and proceed with the termination claim and then, for example, seek a termination order) (clause 13)

Order for sale: requires the tenancy to be sold and the proceeds distributed (clause 14)

A joint tenancy adjustment order: releases the reluctant party from the joint tenancy (clause 17)

Qualifying interest holders may apply for (clauses 11(1), 15 and 16):

A transfer order: requires the tenancy to be transferred to the applicant or a third party (for example, a tenants’ management company)

A new tenancy order: grants the applicant a new tenancy of all or part of the demised premises.

Index

Not Universal

The Exceptions

•

Alternative regimes

Schedule 1 to the draft Bill lists existing statutes which provide for certain types of tenancy Rent Act statutory tenancies; Housing Act assured – and therefore also assured shorthold – tenancies; secure periodic tenancies (section 86 of the Housing Act 1985); introductory tenancies and demoted tenancies (Housing Act 1996); long residential tenancies being continued following expiry of the term under Schedule 10 to the Local Government and Housing Act 1989): in each of these cases, the landlord may still terminate the tenancy and seek possession following a breach of covenant under their own scheme in question.

•

Termination of a business tenancy under section 29(4) of the 1954 Act is preserved

•

Termination of a tenancy of an agricultural holding by notice to quit under section 26 of the 1986 Act is preserved.

•

There is the important saving of termination of tenancies under Schedule 1 to the Sexual Offences Act 1956 (where the tenant has been convicted of using the premises as a brothel and refuses to assign).

Index

Detail

Preliminary matters

•

The main impact of the reforms will be confined to two specific sectors of tenancy

the commercial sector

the long residential sector

•

It is principally concerned with fixed term tenancies

•

While the scheme may be applied to agricultural tenancies, it is unlikely to be invoked for this purpose in practice

Tenancies affected

The scheme applies to all tenancies, whenever granted:

•

Pre-commencement tenancy

a breach of covenant will only be a tenant default where the landlord would have been entitled to “re-enter” (that is, the tenancy reserved a right of re-entry, exercisable by the landlord in the events that have happened).

•

Post-commencement tenancy

all breaches of covenant are potentially tenant defaults, BUT the parties may stipulate in the tenancy that breach of a particular covenant, or covenants, shall not be a tenant default. Such covenants are “excepted” from the operation of the scheme.

There is no requirement that a post-commencement tenancy should include a right of re-entry.

10.

The protection of derivative interests

The scheme recognises that termination of a tenancy may effect others than the landlord and the tenant. As “the branches fall with the tree”, those holding interests derived out of the tenancy are vulnerable in the event of its falling in.

•

Those with security over the tenant’s interest (mortgagees, and chargees, widely defined as under Land Registration Act 2002, s 132(1))

•

A person with an options or rights of pre-emption

•

A person with a right to an assignment of the whole or part of the demised premises (or a right to an assignment of a charge on the tenant’s or the sub-tenant’s interest), that right should qualify. This is giving some protection to a surety or guarantor who, under the terms of their agreement with the tenant, may require the tenant to assign the tenancy to them (or to grant them a mortgage or a charge over the tenancy) on being called upon by the landlord to make good the tenant’s default.

•

A former tenant called upon by the landlord perhaps pursuant to an authorised guarantee agreement, is entitled to an overriding lease (see section 19 of the Landlord and Tenant (Covenants) Act 1995).

Index

11.

Landlord's knowledge of qualifying interests

The landlord will have

•

Deemed knowledge of qualifying interests registered at HM Land Registry and at Companies House, as well as the appropriate local land charges register.

•

Actual knowledge where the landlord has been notified of the interest in writing.

•

Actual knowledge or imputed knowledge of those facts actually known to him, or known to any employee or agent of his and which that employee or agent is required to inform him (clause 31)

Procedure

12.

If a landlord wishes to terminate on the ground of a breach of covenant or condition in a tenancy:

•

the landlord must use the statutory scheme (that is, “take termination action”)

but

•

the landlord may only use the statutory scheme if the breach in question is a “tenant default”.

Note: The scheme does not prevent the landlord from terminating the tenancy by giving notice, or by exercising a break clause, where the tenancy makes specific provision.

13.

Tenant default

The vital pre-condition for taking “termination action” is “tenant default”.

•

Breach of covenant or condition of the tenancy

•

Open to the parties to agree that the breach of one or more covenants will not constitute a tenant default

•

No need for a forfeiture clause or right of re-entry

BUT before the landlord serves any notice on the tenant intimating his or her intention to take termination action the tenant should be given an “explanatory statement”, explaining the landlord’s right to take termination action in response to tenant default (clauses 5 and 19).

The court has power to dispense with service of an explanatory statement where it thinks it just and equitable to do so.

Index

Two forms of termination action

14.

Summary termination procedure

•

It is a notice-based procedure.

•

The landlord must elect – It cannot be run concurrently with the court-based procedure.

•

This procedure is NOT available where

someone is lawfully residing in the premises

the unexpired term exceeds 25 years

where the Leasehold Property (Repairs) Act 1938 would apply (breach of repair covenant and term in excess of 7 years with 3 or more years unexpired)

where tenancy expressly excludes summary termination procedure

pre-commencement tenancy which does not allow peaceable re-entry

post-commencement tenancy, which expressly provides that the summary procedure, cannot be used.

•

Serve “summary termination notice” on tenant and qualifying interest holders (clause 18)

will not require remedy – if remedy required, summary procedure not appropriate.

Effect: The tenancy and all interests deriving end after 1 month

•

BUT the tenant or any qualifying interest holder can apply to set aside the notice (suspends the termination of the tenancy until it decided)

If application made to discharge there is a statutory presumption, in favour of discharge.

At hearing landlord must rebut the presumption that the notice should be discharged by showing

no realistic prospect that court would not make a termination order, and

no other reason why the matter should be disposed of by a termination claim

•

If notice set aside, landlord must issue a tenant default notice and start termination claim

•

Relief available for up to 6 months after summary termination (i.e. “post-termination order”) to make any order SAVE that the court may NOT retrospectively revive the terminated tenancy.

Index

15.

Termination claim – Long form Termination claim – Long form

Tenant Default Notice

•

Any landlord who wishes to bring a termination claim should serve a tenant default notice on the tenant and on those qualifying interest holders who are known to the landlord (clause 4)

•

Tenant default notice must set out details of the default, remedial action required and date by which it should be remedied (minimum 7 days – but must be a reasonable “deadline”)

•

Limited shelf life – No notice can be served for a tenant default more than 6 months old

•

There can be no waiver

•

The notice must also be delivered to the demised premises addressed to “The Occupier”

•

The court has a residual dispensation power (clause 8). If the landlord brings a termination claim without having served a tenant default notice, or having served a notice which does not fully comply with the rules, the court may still proceed to hear the claim if it takes the view that it is just and equitable to do so.

•

The intention is that default notice should act as a catalyst for negotiations between landlord, tenant and qualifying interest holders

Termination Claim

•

Commencing termination claim does not in itself cause tenancy to terminate

•

Claim in new prescribed form

•

Serve on tenant and on all qualifying interest holders who have previously been served with a tenant default (including occupier)

Index

Orders

16.

Discretion

The Court has an absolute discretion to make the orders. There are no fetters to the discretion (other than proof of tenant default)

•

no particular “grounds” need be established, and

•

no particular threshold has to be surmounted, before an order can be made.

17.

The approach

•

First apply the principle of proportionality to the determination of the outcome of the case

•

Secondly have regard to the statutory check-list that the court is required to take into account (clause 9)

18.

Pertinent questions

•

Is the tenant likely to lose a significant capital asset as a result of a relatively trivial breach of covenant that has not caused the landlord any substantial loss?

•

Is the landlord likely to obtain a windfall gain out of proportion to the loss suffered as a result of the tenant’s default?

•

Is the landlord likely to be seriously prejudiced (for example, by the value of the reversion being adversely and irretrievably diminished) if the tenancy is allowed to continue?

19.

The statutory checklist

•

Conduct (of landlord, tenant, or qualifying interest holders). This may include past breaches of covenant by the tenant (whether or not a termination claim was brought, and whether or not they have been remedied), as well as representations by the landlord that a termination claim would not be brought in response to a particular tenant default.

•

The nature and terms of any qualifying interests and the circumstances in which they were granted. One important consideration here would be whether a qualifying interest was “lawful”, in other words whether the landlord consented to its grant.

•

Remedy of the default. If it has been required by the tenant default notice, whether it has been effected, or whether remedy can be effected.

•

The reasonableness of any deadlines set by the landlord in the tenant default notice. Did the landlord give the tenant long enough to carry out any remedial works?

•

Compliance with the terms of a remedial order. Has the tenant complied with a remedial order made earlier in the termination claim, or is the tenant likely to comply with a remedial order if the court were minded to make one?

•

Other remedies available to the landlord. For example, the court may ask whether the landlord could be adequately compensated in damages.

•

Any other matter which the court thinks relevant.

Index

20.

Note: The six orders are not an exhaustive list

The court hearing a termination claim may make other orders available to it within its general jurisdiction including orders:

•

for specific performance

•

injunctive relief

•

awarding of damages

•

for interest and costs

•

possession orders.

21.

Orders for sale

Obviously an order for sale cannot ride rough-shod over the rights of third parties:

•

The tenancy may contains covenants prohibiting assignment. If there is an absolute covenant, the court may not make an order for sale unless the landlord consents. If there is a qualified covenant, the court may not make an order for sale unless either the landlord consents or the court is satisfied that the landlord’s refusal to consent is unreasonable (clause 11(3) and (4)).

•

There may be a charge over the tenancy, which itself contains a covenant by the tenant not to assign. In such a case, the court may not make an order for sale unless the person holding the charge consents (whether the covenant is absolute or qualified). This means that a person with a charge over the tenancy may effectively veto the making of an order for sale (clause 11(6)).

22.

Miscellaneous

•

Long residential tenancies

The Bill preserves the protection afforded by chapter 5 of the Commonhold and Leasehold Reform Act 2002 (paragraphs 3 and 4 of Schedule 2)

•

Tenancy Insolvency –

The Bill does not diminish protection accorded to insolvent tenants e.g. leave of the court required before serving a summary termination notice (Schedule 5)

Index

Conclusion

23.

Commendation for the Bill

“ …it is a quite outstanding piece of legislation. It is elegant, easy to follow, and utterly compelling in its logic. It is also commendably concise (35 clauses and seven Schedules), and it does everything that is necessary to bring about this important reform, leaving the absolute minimum (principally the forms) to secondary legislation.” Stuart Bridge: Law Commissioner

Francis Collaço Moraes