This week’s Legal Update looks at a decision of the Upper Tribunal (“UT”) concerning whether seeking a monetary judgment for unpaid service charges amounts to a waiver of the landlord’s right of forfeiture.

What is forfeiture?

The ability to forfeit enables a landlord, in certain circumstances, to re-enter their leased property following a breach by the leaseholder, and by doing so, terminate the lease as well as any associated interests connected with it (such as any mortgage secured against the lease). In order for the right of forfeiture to exist, the lease must expressly reserve a right of forfeiture or re-entry to the landlord, and the circumstances giving rise to that right must have arisen.

Note that, in relation to property occupied as a residence, a landlord cannot re-enter the premises  without having first obtained an order for possession from the Court which is lawfully executed by an eviction (either by the County Court bailiffs or High Court Enforcement Officers), pursuant to the restrictions contained in the Protection from Eviction Act 1977. It is the act of service of that claim for possession which formally effects forfeiture of the lease.

Our Legal Update here contains information on the circumstances in which a leaseholders might be able to obtain relief from forfeiture, thereby enabling the lease to be reinstated.

What action needs to occur before forfeiting a residential lease?

Prior to forfeiting a residential lease, a notice pursuant to Section 146 of the Law of Property Act 1925 must be served by the landlord on the leaseholder. This notice will provide the leaseholder with three key pieces of information:

1. Details of the breach of covenant

2. Providing a chance to remedy the aforementioned breach

3. Requiring the leaseholder to pay compensation for the breach

However, before any Section 146 notice can be served, the landlord must first obtain a determination of the Court or First-Tier Tribunal (“FTT”) that a breach has occurred, or the leaseholder must admit the breach (Section 81 of the Housing Act 1996 (“the 1996 Act”) in relation to service charges and Section 168 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) in relation to any other breaches).

The above applies in relation to any breach of covenant except for non-payment of rent, for which a landlord can forfeit the lease by commencing proceedings immediately for possession of the property under Section 138 of the County Courts Act 1984, without the need for any prior determination of the rents due or any Section 146 notice being served.

Statute has introduced further restrictions on when a residential lease can be forfeit. Under Section 167 of the 2002 Act, forfeiture can only occur where the amount of rent, service charges or administration charges (or a combination of them) outstanding exceeds the prescribed minimum of £350, or consists of or includes an amount which has been payable for more than three years.

Waiver

The right of forfeiture can be lost or waived easily and care should therefore always be taken to ensure a waiver does not occur. Waiver occurs where, once the landlord has knowledge of the breach of lease, an unequivocal act is undertaken to recognise the lease as ongoing. We therefore always advise that, once a breach has occurred, all correspondence should be ceased with the leaseholder to avoid any unintentional act of waiver, and without prior legal advice this should include:

• All service charge and ground rent demands, including administration charge demands, being put on hold;

• All payments received from the leaseholder being rejected;

• Not engaging in any other correspondence with the leaseholder including emails, letters, call and meetings in respect of any matters related to the lease or even the wider building, even if unrelated to the breach in question.

Our Legal Update here contains more information about waiver and the ‘Do’s and Don’ts’ to avoid waiver occurring.

The case of Clemente v Mindmere Ltd [2024] UKUT 50 (LC)

Mr Clemente was a leaseholder of a flat of which Mindmere was the freeholder. Mr Clemente was, as per his lease terms, obligated to pay service charges pursuant to a proportion amount confirmed within his lease.

Mr Clemente’s lease also contained a standard covenant under which he was obligated to pay legal costs as below :-

“To pay all costs charges and expenses (including Solicitors' costs and Surveyors' fees) incurred by the Lessor for the purpose of or incidental to the preparation and service of a notice under Section 146 and/or 147 of the Law of Property Act 1925 notwithstanding forfeiture may be avoided otherwise than by relief granted by the Court.”

Mr Clemente failed to pay service charges due under the lease and  Mindmere issued proceedings in the County Court to seek a money judgment against him. The Court transferred the proceedings to the First Tier Tribunal (“FTT”) for determination, as is commonly the case where the dispute relates to service charges.

Within the proceedings, Mindmere confirmed that the action it had taken was in order to satisfy Section 81 of the 1996 Act and was therefore for the purposes of or incidental to forfeiture and thus that Mr Clemente was required to pay the legal costs it had incurred under the terms of his lease. At first instance, the FTT agreed with Mindmere and determined that the full service charge balance and associated legal costs were payable by Mr Clemente.

However, Mr Clemente appealed that decision to the UT, arguing that Mindmere’s actions to pursue a money judgment against him must amount to a waiver of the right to forfeiture as it relied upon the contractual costs recovery provision in the lease.  If that was correct then, the contractual liability to pay costs, which arose only where the landlords action was in contemplation of forfeiture,  could no longer be engaged as, because of the waiver, forfeiture was no longer possible.

The appeal was dismissed by the UT, who (quite rightly) found that issuing a money claim to enforce an existing debt did not amount to a waiver of the landlord’s right to forfeit the lease.

Conclusion

The UT’s decision was clearly the right one. Section 81 of the 1996 Act provides an express basis for obtaining a determination by the County Court (or FTT) of the service charges due, as a necessary precursor to forfeiture of the lease. Further, given that a money claim is to secure payment of sums which have already fallen due, it is hard to see how such a claim could be held to amount to a recognition of the continued existence of the lease and thus a waiver of the landlord’s right to forfeit.

Nonetheless, the decision will be a welcome one for landlords and those involved in the collection of service charges, as it confirms that the landlord’s necessary steps in action against a defaulting leaseholder will not impinge upon its most valuable ability to forfeit the lease and claim any associated costs where the lease so allows.

If you have any queries on this week’s Legal Update, please contact a member of the team on 01435 897297 or info@kdllaw.com.  

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole. 

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