The end of forfeiture? What the commonhold and leasehold reforms mean for residential lease enforcement

Forfeiture has occupied an unusual position in residential leasehold law for decades. It is a remedy of considerable theoretical severity, yet one which, in the context of long residential leases, is surrounded by substantial statutory and procedural safeguards and is comparatively rarely carried through to conclusion.

The draft Commonhold and Leasehold Reform Bill (CLRB) proposes to change that position fundamentally. Alongside the government’s wider programme to reinvigorate commonhold, restrict the creation of new leasehold flats and reform ground rents, the CLRB proposes to abolish forfeiture for long residential leases and replace it with a new statutory lease enforcement regime.

For practitioners, this is much more than a change in terminology. It potentially alters the strategy, procedure and economics of residential lease enforcement.

From forfeiture to proportionate enforcement

Under the existing regime, forfeiture derives principally from the contractual right of re-entry contained in the lease, operating against the statutory framework, including:

• section 146 of the Law of Property Act 1925, and
• in the residential context, sections 81 of the Housing Act 1996 and 168 of the Commonhold and Leasehold Reform Act 2002.

The draft CLRB adopts a fundamentally different starting point.

Section 138(1) provides that a long residential lease may not be terminated because of a breach of covenant. A contractual provision that purports to permit termination would cease to be enforceable.

The government describes forfeiture as a “draconian” threat. It proposes replacing forfeiture with what it regards as a fairer and more proportionate lease enforcement scheme for landlords and leaseholders alike.

The important point is that abolition of forfeiture does not mean abolition of effective enforcement. Instead, the emphasis moves from a contractual power ultimately capable of terminating the lease to a court-supervised system under which the remedy is tailored to the seriousness and circumstances of the breach.

The new lease enforcement claim

Under the proposed regime, qualifying landlords will be able to pursue a statutory lease enforcement claim. The remedy is subject to a series of conditions, including requirements concerning the:

• status of the lease
• service of a prescribed explanatory statement
• enforceability of the covenant, and
• establishment of the underlying breach.

A breach will generally need to have been admitted in writing or finally determined before the enforcement machinery can proceed. A formal lease enforcement notice will then be required.

Practitioners accustomed to section 146 work will immediately recognise some familiar concepts, but the architecture is materially different.

Financial breaches are particularly significant. The draft envisages a statutory minimum before the enforcement jurisdiction becomes available, with secondary legislation expected to prescribe a figure between £500 and £5,000.

Certain breaches are excluded altogether, including non-payment of ground rent and specified breaches connected with insolvency, death or incapacity.

This will make correct identification and classification of the breach critical before proceedings are commenced.

A new remedial landscape

Perhaps the most important practical change is the breadth of the court’s proposed remedial discretion.

Once the statutory requirements are satisfied, the court would not simply decide whether forfeiture should occur. The court may make an order which it considers appropriate and proportionate, or dismiss the enforcement claim. Relevant considerations include:

• the parties’ conduct
• the seriousness of the breach
• whether it has been remedied
• the prospect of future compliance, and
• the effect of the proposed order upon other interested parties.

Two remedies are particularly important.

First, the court may make a remedial order, requiring the leaseholder to take specified action within a particular time. Failure to comply may then materially strengthen a subsequent enforcement claim.

Second, at the more serious end of the spectrum, the court may ultimately make an order for sale. The sale would be conducted by a receiver and the proceeds distributed according to the statutory order, including payment of sale costs, sums due to the landlord, secured creditors and ultimately the leaseholder.

This distinction is central to understanding the reform. Under forfeiture, the potential consequence of breach is loss of the leasehold interest itself.

Under the proposed system, even where the breach ultimately justifies sale, the leaseholder’s equity is not automatically extinguished.

What does this mean for litigation strategy?

For legal practitioners, enforcement is likely to become more expressly evidence-based and remedy-focused from the outset.

A landlord’s solicitor will need to consider not merely whether a covenant has been breached, but what outcome should properly follow from it. The proportionality of the proposed remedy will need to inform advice, correspondence and evidence at an early stage.

This is likely to increase the importance of questions relating to the seriousness of the breach, the prejudice to the landlord and other residents and whether a remedial order would be appropriate in the circumstances.

For practitioners acting for leaseholders, the same structure creates obvious opportunities. Prompt remediation, reasonable engagement and evidence demonstrating future compliance may become particularly important when the court considers proportionality.

The history of the parties’ conduct may consequently assume still greater significance.

Costs will remain important

One anxiety surrounding the abolition of forfeiture has been its effect upon contractual costs recovery. The draft legislation attempts to address that problem.

For pre-commencement leases, provisions requiring a leaseholder to meet costs associated with forfeiture are proposed to be read as applying to reasonable costs connected with a lease enforcement claim.

Post-commencement leases would contain an implied obligation relating to reasonable enforcement costs. The court would nevertheless retain a “just and equitable” jurisdiction over relevant costs.

This will be an important area for practitioners because disputes concerning the construction and recoverability of enforcement costs have generated substantial litigation under the present regime.

Managing agents and portfolios will need preparation

The reform also has implications beyond litigation departments.

Landlords, managing agents and asset managers should eventually review standard arrears and breach procedures, precedent correspondence and escalation policies. Lawyers advising them will need to make sure historic processes built around section 146 notices are not simply transferred mechanically into the new regime.

Legacy leases will also require particular attention. The draft legislation expressly addresses the relationship between existing forfeiture clauses and the replacement enforcement machinery.

There may also be important questions concerning who can invoke the statutory regime. Commentary on the draft has already identified possible issues concerning right to manage and resident management companies where they enforce covenants without themselves occupying the position of landlord.

These questions may be especially significant in developments where management functions and enforcement rights are divided between several entities.

A fundamental change, but not the end of enforcement

It would be misleading to characterise the reforms simply as removing a landlord’s ultimate sanction. The better description is a restructuring of residential lease enforcement.

Forfeiture combines enforcement and termination. The proposed system separates them.

The court will instead have an expressly proportionate range of remedies, potentially culminating in sale in sufficiently serious cases, while avoiding the consequence whereby the landlord ultimately acquires the leaseholder’s valuable interest through forfeiture. 

For property litigators, the result may be a subtle but important change in professional mindset. The central question will increasingly become not simply, “Has there been a breach permitting enforcement?”, but “What order is proportionate to that breach?” 

This change is likely to influence everything from the first letter of advice through to pleadings, witness evidence, settlement negotiations and submissions at trial.

There is, however, an important qualification. The draft CLRB is not yet the operative law. The government published it for scrutiny and consultation, together with separate material dealing specifically with enforcement of long residential leases.

Practitioners should therefore resist rewriting established procedures prematurely.

Nevertheless, the direction of travel is clear. If enacted substantially in its present form, the abolition of forfeiture will represent one of the most significant changes to residential landlord and tenant enforcement practice for generations.

The threat of forfeiture may disappear, but lease enforcement certainly will not. It is instead likely to become more structured, more explicitly proportionate and, for practitioners advising landlords and leaseholders alike, potentially more sophisticated