Termination of Tenancies for Tenant Default (Consultation Paper) [2004] EWLC 174(1) (15 December 2003)

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URL: http://www.bailii.org/ew/other/EWLC/2003/174(1).html
Cite as: [2004] EWLC 174(1)

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PART I

INTRODUCTION

The function of this Consultation Paper

This Consultation Paper seeks views of respondents on reform of the means whereby tenancies can be terminated by the landlord during the term where the tenant has broken obligations in the tenancy agreement. Its provisional proposals are intended to provide a statutory scheme to reform the current law of forfeiture of tenancies. It is an area of the law which has been the subject of frequent criticisms for many years. It is complex, it lacks coherence, and it can lead to injustice.

The Law Commission is already engaged on an important project, Renting Homes, which will make detailed recommendations for the reform of the law as it applies to all those who rent their homes from landlords, whether in the public or private sector. This consultation is not part of that project, although it is intended to be complementary to it. In so far as residential tenancies are concerned, the interim Renting Homes Report contains recommendations dealing with the termination of the tenancy, and the recovery of possession by the landlord, in response to the tenant's breach of obligation.

The statutory scheme which we propose in this Paper is intended to apply to all tenancies with the exception of residential tenancies falling within the Renting Homes scheme. It will be of principal effect to two types of tenancies: commercial tenancies and "long" residential tenancies, by which we mean tenancies granted for a fixed term of at least 21 years.

The legal background

A tenancy is a property interest, an estate in land, which is created by agreement between the landlord and the tenant. The landlord will currently seek, in the terms of the tenancy, to reserve the right to terminate the tenancy by means of a forfeiture clause, otherwise described as a right of re-entry. This right is itself an interest in property which is capable of binding successors in title to the tenant, including sub-tenants. The invocation of a forfeiture clause may therefore have profound implications not only for the tenant whose actions, typically failure to pay the rent or breach of some other obligation (or "covenant") contained in the tenancy, have activated the landlord's right to forfeit the tenancy, but also for other parties such as sub-tenants and mortgagees whose rights derive from the tenancy.

It is essential to draw the distinction between periodic and fixed term tenancies. A periodic tenancy may be created by express agreement of the parties (that the tenancy is "weekly", "monthly" or "yearly" as the case may be) or by implication from their conduct (that the tenant goes into possession and pays rent to the landlord on a periodic basis

A periodic tenancy can by definition be terminated by notice to quit. Unless that period of notice is long, it will almost always be simpler, and more effective, for the landlord to terminate by notice than by seeking to forfeit the tenancy. As we shall see, forfeiture is a complex procedure. Not only are there traps for the unwary, success cannot by any means be guaranteed as the court has a generous jurisdiction to grant relief to the tenant. It follows therefore that forfeiture is almost exclusively exercised in relation to fixed term tenancies. In that context it is a highly significant remedy, enabling the landlord to effect premature termination of the tenancy where it is clear that the tenant is unable or unwilling to comply with the obligations contained in the tenancy.

The scope and extent of this project

The law of forfeiture applies to tenancies of many different kinds of property: commercial properties, such as offices, shops and factories; residential properties, such as houses and flats; and agricultural properties, such as farmhouses and farmland. Its relative importance in each of these sectors depends upon two issues: the extent to which parties are accustomed to use fixed term tenancies as opposed to periodic tenancies, and the effect of statutory intervention.

Where fixed term tenancies are commonly employed, and there are no statutory restrictions on the use of forfeiture, it can be expected that forfeiture will be an important component of the landlord's armoury. This is the case with business tenancies. Although Part II of the Landlord and Tenant Act 1954 regulates the termination of business tenancies, it does not restrict the exercise of forfeiture by the landlord.

In the case of periodic tenancies, forfeiture will be rarely encountered. Where the tenancy is readily terminable by notice to quit, the landlord is likely to respond to tenant default by serving such notice. Unless a system of statutory security is applicable, the tenant will be unable to resist the landlord's action and to defend an action for possession. Most agricultural properties are let on periodic tenancy, and while there are statutory controls concerning the effectiveness of notice to quit, the landlord is much more likely to invoke this procedure rather than seek to forfeit for breach of covenant. Periodic tenancies are also commonly used by public and private sector landlords of residential property. The matter is further complicated by the plethora of statutory protective codes, themselves the subject matter of our current major project Renting Homes.

The Rent Act 1977 provides that where a landlord terminates a "protected" tenancy by forfeiture, the tenant will be entitled to continue in occupation by reference to a "statutory" tenancy. The landlord can only recover possession against a "statutory tenant" by obtaining an order of the court on proof of specific grounds. Forfeiture of a protected tenancy, while lawful as long as it complies with the terms of the tenancy and with the Protection from Eviction Act 1977, does not usually result in recovery of possession. The landlord will only be able to re-possess where the tenant ceases to occupy the premises or where the court executes an order for possession granted on proof of statutory grounds.

More recent statutes conferring security on residential tenants have taken a different approach, denying the landlord the right to terminate the tenancy by means of forfeiture. The Housing Act 1985 provides that a landlord cannot forfeit a secure tenancy. Instead, he or she may apply to the court for an order terminating the tenancy on a specific date.

We criticised the complexity of the law of forfeiture of residential tenancies in our recent Consultation Paper Renting Homes 1: Status and Security.

(1) the terms of a fixed term type II agreement should provide that, during the contractual period, the landlord is entitled to bring proceedings for possession before the end of the fixed term if the circumstances we have classified as occupier default or social policy arise. Such an order for possession would only be made where the court thought it reasonable in the exercise of its discretion.

(2) (for the avoidance of doubt) the procedures for seeking possession in these circumstances should be those provided for within the scheme we propose, and ... the law and procedures relating to forfeiture of tenancies should not apply.

In summary, Type I agreements are intended to be restricted to periodic tenancies, and forfeiture would have no part to play. While it is envisaged that landlords will be able to recover possession of premises occupied pursuant to Type II agreements during a fixed term, such action would be strictly regulated by the statute which gives effect to the recommendations contained in the final Renting Homes Report. Neither agreement would be subject to the regime for termination of tenancies set out in this Consultation Paper.

It is essential in our view that there is a clear demarcation between the two statutory regimes which are currently under consideration at the Law Commission. We provisionally propose to exclude from the termination of tenancies scheme residential tenancies granted for a term of less than twenty-one years.

We therefore see the present project as being of principal impact in two areas: those of commercial tenancies (or "business tenancies") and "long" residential tenancies. It is common business practice to grant tenancies of commercial premises for a fixed term of years at a capital premium, with a rent which is reviewable at prescribed intervals within the term. The forfeiture clause is an essential component of such tenancies as it gives the landlord a form of security for the payment of the rent and compliance with the other covenants in the tenancy. Many residential properties, particularly flats, are also let on fixed term tenancies, often for very long terms of hundreds of years, again at a capital premium, with provision made for a ground rent. The forfeiture clause is an important means of ensuring that the tenant (frequently referred to in this context as the "leaseholder") complies with the regime of obligations which is imposed on all those occupying premises within the particular estate. At the same time, it can be seen that there is a tension between the desire of the landlord to ensure that the obligations of the tenancy are obeyed and the hostility of the tenant who has invested substantially in the property to an over-zealous invocation of forfeiture and who may suspect the motive of the landlord in seeking termination of the tenancy and in obtaining the windfall of premature recovery of vacant possession.

The work of the Commission to date

The 1968 Working Paper

This general subject area has been under consideration by the Law Commission for some time. Codification of the law of landlord and tenant was an item of the First Programme. As long ago as 1968, the Commission published a Working Paper which contained provisional proposals relating to termination of tenancies and which dealt with termination by surrender, by notice to quit, by merger, by enlargement and for impossibility of performance as well as termination for breach of obligation and on bankruptcy of the tenant.

The First Report

The First Report recommended two separate schemes for reform, one for termination of tenancies by landlords to replace the existing law of forfeiture, and one for termination of tenancies by tenants to confer rights on tenants which had never previously been enjoyed. It was acknowledged at the time that the two schemes were independent and could be implemented separately.

The objectives of the landlords' termination scheme were essentially to simplify the substance and the working of the law and thereby to save time and costs both in business dealings and in legal proceedings. At the same time, there should be no interference with the reasonable expectations of landlords and of tenants.

The main features of the landlords' termination scheme contained in the First Report

The general intention of the scheme was to sweep away the present law of forfeiture and the archaic doctrine of re-entry and to replace them with a scheme under which there would be no distinction between termination for non-payment of rent and termination for other reasons. The essential features of the scheme can be summarised as follows:

(1) It would be necessary in every case, save where premises had been abandoned, for the landlord to obtain a termination order from the court and the tenancy would continue in force until the date when the court order for termination took effect.

(2) Termination proceedings could be brought by the landlord whenever a "termination order event" (a breach of covenant, or other obligation, by the tenant, or an "insolvency event") had occurred. There would be no necessity for the landlord, in any tenancy granted after legislation came into force, to have made special provision by means of a forfeiture clause or a right of re-entry, and the rules requiring formal demand of rent would be abolished.

(3) The doctrine of waiver would be rationalised, such that a landlord would only lose his right to terminate if his or her conduct were such that a reasonable tenant would believe, and the actual tenant did believe, that the landlord would not seek a termination order.

(4) There would be no general requirement (such as currently exists under section 146 of the Law of Property Act 1925) to serve notice upon the tenant before starting termination proceedings, although there would continue to be special provision for breaches of repairing covenants. There would be an optional notice procedure for the landlord where his or her primary wish was to have the tenant's breach put right.

(5) The court would be given power to make an absolute termination order (terminating the tenancy on a date specified in the order) or a remedial termination order (terminating the tenancy only if the tenant fails to take prescribed remedial action by a date specified). Stringent requirements would have to be met before an absolute order was made, and it was envisaged that in most cases the court would make a remedial order. The court could of course make no order on the landlord's application, but this would only occur if remedial action had already been taken, was not necessary or possible, or ought not to be required. Provision was also to be made conferring complete discretion on the court as to costs.

(6) The general rule that termination of the tenancy would automatically terminate all interests deriving from the tenancy would continue, but the rules as to relief for those with derivative interests such as sub-tenants and mortgagees would be reformed. In particular, there would be a new and comprehensive definition of those entitled to apply for relief ("the derivative class"), the court would be given new powers to preserve existing interests of members of the derivative class, and steps would be taken to ensure that such persons obtained notice of the termination proceedings. In addition, the landlord would be empowered voluntarily to preserve derivative interests if he or she so wished.

(7) The current rule applying to joint tenants that relief can only be given to all or both joint tenants was to be abolished, with appropriate regard being taken of any unjustifiable prejudice which the landlord might be caused in individual cases.

(8) The county court was to be given jurisdiction in all questions arising out of the scheme where the rateable value of the property did not exceed certain limits.

Reception of the First Report

The First Report did not, unusually, append a Bill to give effect to the recommendations being made. The Commission explained:

Drafting clauses would require much work by the Law Commission team and parliamentary draftsmen, not only in converting the proposals into statutory form, but also in fitting the changes into a large number of statutory contexts. We are aware that at least some of the proposals may be thought controversial. Hence, we decided to submit the report without clauses in the hope that it contains sufficient detail for effective further consultation and discussion. If it is decided that the proposals provide the foundations for reforms which are both desirable and capable of implementation, the further work of drafting a Bill, and of detailed consultation upon that Bill, would then be justified.

The recommendations contained in the First Report were, however, well received.

In so far as this scheme required landlords to use court proceedings in order to terminate tenancies in all cases where the tenant did not voluntarily give up possession, it was not well received by representatives of the commercial property industry. They contended that forfeiture by physical re-entry is an effective and commonly used means of bringing a tenancy of commercial premises to an end quickly and relatively cheaply where there is no real prospect of the tenant making good his or her breach of covenant. Concern was also expressed that imposition of a requirement of due process in all cases might result in a large increase in the volume of court business which could prove adverse to those seeking to use the system.

The 1998 Consultative Document

In response to these concerns, the Law Commission published a further Consultative Document in January 1998 on Termination of Tenancies by Physical Re-entry. This expressed the provisional view that if (as appeared to be the case) forfeiture by physical re-entry currently provided landlords with an effective management tool, it would not be beneficial to abolish it entirely. To do so would be to make it "more difficult, time-consuming and expensive" for landlords to terminate tenancies of commercial premises in cases where there is little prospect of the tenant applying for, still less obtaining, relief from the court.

Accordingly, the Commission provisionally proposed the retention of a right for the landlord to terminate a tenancy by physical re-entry. It was contemplated that this ought to be achieved by abolishing the existing common law rules, and by creating a new statutory right. It would be necessary for the landlord to serve notice on the tenant, and on certain owners of derivative interests such as mortgagees of the tenant's leasehold interest, seeking remedy of the breach and allowing the tenant a reasonable time to remedy the breach before exercise of the right of re-entry.

The response to this consultation exercise was broadly positive. In June 1999, the Commission announced the outcome of its consultation exercise. It had been decided, in the light of responses received, that a right of physical re-entry should be retained as part of a new statutory scheme. The lead Commissioner, Charles Harpum, said:

Consultation showed that there is overwhelming support for retaining a right of physical re-entry. Although physical re-entry is a harsh remedy, it can be both effective and justifiable in cases where tenants default on their obligations, whether by failing to pay the rent or otherwise, and where there is no real prospect of them remedying the breach. The Commission's proposals, modified to take account of comments received on consultation, would preserve the remedy in such cases, but with safeguards to ensure the protection of the legitimate interests of tenants.

It was then intended that the Commission would go forward and publish formal recommendations together with a draft Bill to implement the revised termination of tenancies scheme.

The civil justice review

Progress on this project was delayed as a result of the necessary concentration of efforts on other priorities, notably the project on title registration which culminated in the Land Registration Act 2002.

The civil justice reforms, as is well known, seek to give effect to the overriding objective of enabling the court to deal with cases justly. They are intended to affect not only cases being heard in the courts, but also cases which have not yet been initiated. The clearest indication of this intention can be found in the promulgation of "pre-action protocols" which are applicable to distinct types of claim, and which outline the steps which parties should take in order to exchange information about any prospective legal claims. The objectives of pre-action protocols are to encourage the exchange of "early and full" information about the prospective claim, to enable the parties to avoid litigation by agreeing a settlement before proceedings are commenced, and to support the efficient management of proceedings where litigation cannot be avoided.

There is no pre-action protocol applicable generally to landlord and tenant claims. However, we note the invocation contained in the Practice Direction that in those cases not covered by an approved protocol, the court will expect the parties, in accordance with the overriding objective and the matters referred to in CPR r.1.1(2)(a), (b) and (c), to act reasonably in exchanging information and documents relevant to the claim and generally in trying to avoid the necessity for the start of proceedings.

The current Consultation Paper

Why we are publishing this Paper

A difficulty we have encountered as a result of the length of time which has elapsed since the Commission first considered the subject of forfeiture is the lack of consultation responses by participants and advisers currently involved in the property industry. With the exception of the limited consultation on the future of termination of tenancies by physical re-entry conducted in 1997, it is now over twenty years since the views of interested parties were sought on the essential aspects of reform, and the economic conditions and legislative background have changed significantly since then.

On revisiting and reviewing the project, it has become clear that the process of tenancy termination contained in the 1994 Bill is, not surprisingly, in many places inconsistent with the philosophy of the Civil Procedure Rules which now underpins civil litigation in this country. It has as a result been necessary to consider extremely significant amendments to the earlier recommendations, and to bring them forward as a set of provisional proposals for public consultation before proceeding further with a draft Bill to reform the law.

The Civil Procedure Rules are not by any means the only significant development since 1994. We have also taken the opportunity to ensure that our provisional proposals take account of the Human Rights Act 1998 and relevant case law, as well as to achieve consistency with the recommendations emanating from our own major project, itself promoted by the Civil Justice Review, on Housing Law. We review the provisions of Part 5 of the Commonhold and Leasehold Reform Act 2002, which deal with forfeiture of long leases of dwellings, and make provisional proposals. Finally, but by no means least, we make important provisional proposals dealing with termination of tenancies in cases of tenant insolvency to bring our scheme into line with the new processes for corporate administration and company voluntary arrangements contained in the Insolvency Act 2000 and the Enterprise Act 2002.

The Commission considers that the effect of the civil justice reforms on this area of the law has been wholly beneficial, and that those reforms have facilitated the development of an outline statutory scheme which has the benefit of relative simplicity of operation. We shall now describe what seem to us to be the most important features of the scheme which we are envisaging.

The need for a notice before action

It was a central tenet of our earlier recommendations concerning termination of tenancies that the landlord should be expected to use the court process in order to obtain possession of the premises in question. While we have modified those recommendations, it must follow from the civil justice review that invocation of the court process should not be the first step in the landlord's attempts to secure due performance of the tenant's obligations. In order to achieve consistency with the objectives of the civil justice review, we now believe that it should be required in all cases that, prior to commencing proceedings for recovery of possession, the landlord give the tenant due warning of his or her intentions and indeed the opportunity to put right those breaches of obligation of which the landlord complains.

As we have already explained, in devising the outlines of a statutory scheme regulating physical re-entry, the Commission considered that the service of a notice on the tenant, stipulating clearly the respects in which the tenant was in breach of his or her obligations, and setting out clearly what action should now be taken, was an essential safeguard not only of the rights of the tenant but also of the rights of those holding derivative interests. Having given this matter further consideration, we now believe that the service of such a notice should be necessary in all cases where the landlord is seeking to terminate a tenancy as a response to breaches of obligation by the tenant.

Summary of other modifications

The "pre-action notice" requirement is the most important respect in which this Consultation Paper departs from the recommendations in the First Report. There are however other major modifications which we provisionally propose and on which the views of consultees are sought:

(1) The doctrine of waiver is to be replaced by a requirement that the landlord serve the pre-action notice on the tenant within a specified period (six months) of becoming aware of the tenant default.

(2) In deciding whether to make an absolute termination order, the court shall be required to have regard to the conduct of the landlord and of the tenant before and during the proceedings.

(3) The remedial order, requiring the tenant to satisfy certain conditions specified by the court so that the tenancy shall continue, will take effect as an adjournment of the landlord's application for a termination order on those terms.

(4) The derivative class (those who are entitled to claim relief from the consequences of termination of the tenancy) will be defined so as to ensure the inclusion of equitable chargees, and we invite views of consultees as to its general scope.

(5) The orders of the court which may be made on application by members of the derivative class for relief are given further consideration.

(6) Where premises are not being occupied as a residence, the landlord will have the right to recover possession unilaterally (without prior sanction of the court) provided certain notice and procedural requirements are satisfied. This process may ultimately lead to termination of the tenancy where no opposition is made by the tenant.

(7) The relationship between the termination of tenancies scheme and proceedings for the insolvency of the tenant is rationalised.

(8) The current complexity concerning the regulation of forfeiture of tenancies for non-payment of service and administration charges is reviewed and proposals for simplification and rationalisation are made.

Structure of the Consultation Paper

This Paper commences in Part II with a summary of the current law of forfeiture of tenancies. An overview of the termination of tenancies scheme with which we propose to replace the current law is set out in Part III. The remainder of the Paper looks at the detail of the provisional proposals.

We consider in Part IV the meaning of "tenant default" which will entitle the landlord to take steps to terminate the tenancy. Part V deals with the "pre-action notice" requirement, its function, what the notice must contain, and on whom it must be served. Part VI considers the powers of the court when proceedings for a termination order come before it. Part VII reviews the rights and remedies of those holding interests derived out of the tenancy which are likely to be affected by its termination, and the extent to which they should be able to claim, and to obtain, relief from the consequences of termination. Part VIII considers the circumstances in which landlords should be entitled to exercise self-help in order to recover possession of tenanted premises and when termination of the tenancy in question may ensue.

Parts IX to XI consider discrete issues: joint tenants in Part IX, the relationship between tenant insolvency and termination of tenancies in Part X, and service charges in Part XI.

Each Part concludes with a list of provisional proposals on which the views of consultees are sought, and these are brought together in Part XII for convenience. The extent to which our provisional proposals depart from the recommendations contained in the First Report can be tracked from Appendix A. A draft "pre-action notice" can be found in Appendix B.

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Note 1    Law Com No 284, para 6.27.    [Back]

Note 2    In these circumstances the period of the tenancy will be ascertained according to the period with reference to which the rent is calculated.    [Back]

Note 3    Landlord and Tenant Act 1954, s 24(2).    [Back]

Note 4    Housing Act 1985, s 82(3).    [Back]

Note 5    Housing Act 1988, s 5(1).    [Back]

Note 6    Housing Act 1988, s 7(6).    [Back]

Note 7    Law Com C P No 162. The provisional proposals have now been confirmed in an interim report, Renting Homes, Law Com No 284.    [Back]

Note 8    Law Com C P No 162, at paras 8.53 and 8.54.    [Back]

Note 9    Working Paper No 16, published on 3 April 1968 (hereafter “the Working Paper”) .    [Back]

Note 10    Law Com No 142.    [Back]

Note 11    First Report, para 1.8.    [Back]

Note 12    See Termination of Tenancies Bill (1994), Law Com No 221, para 1.13: “We consider that reforms to cure the evident defects in the law of forfeiture should take precedence over implementing proposals for innovation, for which there has been no great support. Indeed, so far as we know there is as yet no consensus that the tenants’ termination order scheme should be adopted. It would not be helpful for the landlords’ termination order scheme to be unnecessarily embroiled in controversy.”    [Back]

Note 13    Since the publication of the First Report there has been steady judicial development of a doctrine of landlords’ repudiatory breach giving rise to a right to terminate on the part of the tenant. See Hussein v Mehlman [1992] 2 EGLR 87; Chartered Trust v Davies [1997] 2 EGLR 83; cf Nynehead Developments v Fireboard Containers [1999] 1 EGLR 7 and Petra Investments v Jeffrey Rogers [2000] 2 EGLR 120.     [Back]

Note 14    First Report, para 1.8.    [Back]

Note 15    First Report, para 1.1.    [Back]

Note 16    1994 Bill, para 1.12.    [Back]

Note 17    Consultative Document, Termination of Tenancies by Physical Re-entry (1998), para 1.7.    [Back]

Note 18    See Law Com No 271.    [Back]

Note 19    CPR PD - Protocols, para 1.4.    [Back]

Note 20    Ibid, para 4.    [Back]

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