In this week’s Legal Update, we report on the case of Derwent Lodge Estates Ltd v Signature Living Hotel Ltd & 54 others [2025] 3 WLUK 402, which highlights the potential liabilities and perils for under-lessees where relief is sought following forfeiture of a head lease.

Background

The case concerned West Africa House, a seven-storey mixed-use building in Liverpool. The building was subject to various leases including leases of commercial premises, and a head lease granted over the entire building to Signature Living Hotel Limited (“Signature Living”). Signature Living developed the residential parts and then granted sub-leases of those 42 flats, retaining the common parts to itself. Signature Living was responsible for insuring and maintaining the building, under the terms of the head lease.

The head lease reserved a substantial ground rent and subsequently the freeholder, Derwent Lodge Estates Limited (“Derwent”), was forced to forfeit the head lease for non-payment of ground rent, following the insolvency of Signature Living. This had the effect of automatically terminating all the sub-leases, and thereby extinguishing the security for those flats charged with mortgages.

The 42 flat owners therefore applied to the Court for relief from forfeiture under Section 146(4) of the Law of Property Act 1925 ("LPA"). 

Relief from forfeiture under Section 146(4)

The effect of the Court granting relief from forfeiture is to reinstate a lease which has otherwise been forfeited as a result of a breach by the lessee, without the need for any new lease to be granted. In other words, the lease continues on the same terms as before the forfeiture occurred.

Section 146(4) of the LPA empowers under-lessees to also apply for relief from forfeiture, in the form of a vesting order, so that under-lessees can take the benefit of the lease that has been forfeited, and thereby regain a proprietary (and financial) interest in the premises affected by the forfeiture.

Relief from forfeiture under Section 146(4) is discretionary, and the Court has a wide discretion when it comes to the terms upon which relief is to be granted, whether for the payment of rent, costs, compensation, the giving security or otherwise, as the Court sees fit.

The flat owners’ application

The flat owners sought relief from forfeiture on grounds that would effectively result in a new head lease just of the residential parts, as they sought a vesting order only on the terms of their original sub-leases (at a peppercorn ground rent). As result Derwent, would be responsible for insuring and maintaining the building. Crucially, this meant that Derwent would be subject to obligations that it had not been previously, prior to the forfeiture of Signature Living’s head lease, including as an “Accountable Person” under the Building Safety Act 2022.

Derwent’s position was, therefore, that any vesting order to the flat owners should be on the same terms as the head lease originally head by Signature Living. In other words, a head lease of the entire building including the commercial parts, under which the flat owners seeking relief would be responsible for insuring and maintaining the building.

The Court’s decision

The Court agreed with Derwent, that whilst the flat owners should be entitled to relief from forfeiture, that should be by way of a vesting order mirroring Signature Living’s original head lease. This meant that the flat owners would become landlord of the commercial premises, and be responsible for the maintenance and insurance of the building, as well as the substantial ground rents to Derwent.

It was made a condition of relief being granted that the flat owners pay the entirety of the rent arrears owed by Signature Living to Derwent for the entire building, and not just in relation to their respective units. The flat owners were then to transfer the head lease to a new management company, who would grant leasebacks to them as per their original sub-leases. 

The flat owners appealed the Court’s decision but the decision was upheld on appeal.

Conclusion

It’s fair to say that the Court’s decision appears unduly harsh to the flat owners, who clearly had no desire to take over the management responsibilities for the building, let alone the landlord functions in respect of the commercial parts, carrying with it a hefty ground rent bill. However, the case is a perfect illustration that relief is primarily a remedy to put the landlord in the same position as if the breach (and forfeiture) had not occurred.

So, whilst the Courts will be sympathetic to under-lessees who might find themselves in such a situation whereby their home and/or financial asset is stripped from them perhaps by no fault of their own, when considering whether and on what terms to exercise its discretion to grant relief from forfeiture, the starting point for the Court will always be position prior to the breach.

This case therefore serves as a stark warning to leaseholders who purchase flats subject to a head lease, of the perils and liabilities which could be imposed upon them in the event of the head lease being forfeited, to avoid losing their homes and/or financial assets as a result of that forfeiture.

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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