The threat of forfeiture is a very effective way of forcing payment of service charge arrears where all other attempts have failed.
Forfeiture of a residential long lease leads to the recovery of the property, which can be re-sold on a new lease, without having to account to the leaseholder for the profit sale. For this reason, leaseholders with substantial equity in the property and their mortgage company will want to protect the lease.
Mortgages often have a clause that enables the mortgage company to pay off the debt and add it to the mortgage but mortgagees will not take action unless the landlord initiates the forfeiture procedure.
If there is no mortgage, the likely outcome will be that the leaseholder will take a loan secured against the property in order to discharge the debt to the landlord rather than face the consequences of forfeiture.
There are, however, a number of statutory provisions designed to make it more difficult for a landlord to forfeit a residential long lease.
- The lease must contain a clause giving the landlord a right to forfeiture, in the event of a breach of the lease.
- A breach of the lease must have taken place, of a kind stated in the forfeiture clause.
- If the breach is the non-payment of service charges, the landlord must prove that the service charges were demanded according to the terms of the lease, as well as within the statutory framework.
- If the breach is unpaid ground rent, service charges or administration charges (or any combination of them), the amount unpaid must be either over ￡350.00, or must have remained unpaid for longer than 3 years (s167 of the Commonhold and Leasehold Reform Act 2002 and the Rights of Re-entry and Forfeiture (Prescribed Sum and Period) Regulations 2004).
- Determination of the breach- unless the leaseholder has admitted the breach of the lease, the landlord must obtain a “determination” of the breach: that is, a judgement for the sum due, in either the County Court or the First- Tier Tribunal (Property Chamber). That is a requirement under s168 of the Commonhold and Leasehold Reform Act 2002 and s81 of the Housing Act 1996.
- If the landlord decides to pursue the County Court route, care must be taken not to obtain a default judgment in the absence of a defence, since that may not count as “determination”. It is safer to request the Court to list a hearing, so that a judge can consider the claim, and give a normal money judgement: see Hillbrow(Richmond)Ltd v Alogaily[2006] CLY 2707.
- Section 146 Notice- not less than 14 days after the determination (or admission) is obtained, the landlord must send a notice to the leaseholder under s146 of the Law of Property Act 1925, setting out the breach (using the exact words of the Court or Tribunal’s determination), and requiring the leaseholder to remedy it within a reasonable time.
- Section 146 requirement does not apply in relation to the non-payment of ground rent. However, if service charges are “reserved as rent” under the lease, a s146 notice must still be served once unpaid service charges have been admitted or determined: see Freeholders of 69 Marina, St Leonards on Sea v Oram [2011] EWCA Civ 1258).
- Waiver - after the breach, the landlord must not say or do any act which unequivocally treats the lease as continuing. Once a decision has been taken to pursue forfeiture, the safest way to avoid waiver is to cut off any?communications with the leaseholder (other than getting the determination judgement, and serving the s146 notice).
Common acts of waiver include:
o??Demand and accepting payment or part-payment of ground rent or service charges.
o??Sending?reminder?notices about unpaid service charges or ground rent.
o??Demanding the payment of legal costs under the terms of the lease during the determination proceedings.
The claim for possession should be in form N5. Detailed particulars of claim must be filed and served with the claim form (CPR Rule 55.4).
The particulars of claim must include the following details:
- A statement that the lease has been forfeited by the issue of the claim;
- Particulars of the lease, with a full copy of the lease exhibited;
- Particulars of the determination or admission, with judgment or proof of admission exhibited;
- Particulars of the s146 notice, with a copy of the notice exhibited;
- Particulars of any person (including a mortgagee) entitled to claim relief from forfeiture as an underlessee;
- A request for legal cost to be paid as a contractual right under the lease (if the lease contains a costs clause covering forfeiture costs.)
Prepare a witness statement setting out the evidence relied on; file and serve it at least 5 clear days before the hearing date.
File and serve a draft order, setting out the details of the lease, the amount in the admission or determination, the interest and the costs claims, and also including a standard “relief from forfeiture” paragraph, allowing the leaseholder to pay off the debt within 28 days in order to avoid the possession order taking effect.
While forfeiture is not the quickest way to recover service charge arrears, it makes sense to adopt a policy that involves enforcing forfeiture clauses where all other attempts have failed.
