Accepting "part" of a cheque without waiving forfeiture

Osibanjo v Seahive Investments Limited [2008] EWCA Civ 1282 (Court of Appeal)

Are there circumstances in which a landlord can accept only part of a cheque offered by a tenant and thereby avoid waiving its right to forfeit? It would appear that there are, according to the Court of Appeal in this case which raises interesting questions about the thorny issue of waiver of forfeiture.

The trial judge found that the tenant had breached numerous covenants in the lease (against alterations, change of use, parting with possession, and keeping the business premises — a public house — open).  Rent arrears built up in 2005 and the landlord (Seahive) served a statutory demand on 30 November 2005 on account of the rent arrears. Seahive petitioned for the tenant’s bankruptcy in January 2006 but the matter had been adjourned a number of times when, in June 2006, Seahive became aware of the tenant’s breach of covenant.

In October 2006 (shortly before the petition for bankruptcy was due to be heard) the tenant sent a cheque for £10,000 to Seahive. The covering letter with the cheque made it clear that the sum was to cover the amount then due under the statutory demand (£3414.80) and any further arrears of rent that had arisen subsequently.

Seahive banked the cheque, but returned £6585.20 (i.e. the balance after £3414.80 had been removed), in turn expressing its intention to reserve their right to forfeit the lease.

The bankruptcy proceedings were duly brought to a close, but in forfeiture proceedings the judge refused to find that Seahive had waived their right to forfeit. The tenant appealed on the following grounds, alleging that all of the following acts which were done by Seahive after knowledge of the breach(es) of covenant consituted a waiver of forfeiture:

  1. Banking the cheque;
  2. Commencing and pursuing a bankruptcy petition (where the underlying debt was arrears of rent);
  3. Accepting money to discharge a bankruptcy debt (in respect of arrears of rent).

The rule on waiver of forfeiture is reasonable clear from authority: where rent has accrued after a breach of covenant and where payment for that rent is tendered by the tenant and accepted by the landlord after the landlord has had notice of the breach of covenant, the landlord is treated as having elected to waive the right to forfeit the lease. It is also reasonably clear that the intention of the landlord is immaterial: the test is an objective one.

Lord Justice Mummery had no difficulty disposing of point 1. He was particularly influenced by the fact that the tenant intended to clear the bankruptcy debt and the only way that Seahive could accept the tenant’s payment to end proceedings was by banking the cheque. The judge reasoned that merely processing the cheque was not sufficient evidence that it had been accepted as rent:

The judge’s reasoning on the second point is harder to follow. The bankruptcy proceedings were started before Seahive had knowledge of the breaches (so that part of the tenant’s argument had no force) but they were continued afterwards. The judge argued that if the tenant’s argument was correct: the landlord could not forfeit for bankruptcy, because in order to forfeit proceedings would have to be brought which would waive any breach.

That is, of course, a confused analysis. The right to forfeit for bankruptcy accrues only after the order is made, any action taken before that point by the landlord could not possibly waive that right. There is nothing illogical in putting a landlord to election between either (i) bringing bankruptcy proceedings for failure to pay rent and waiving any other right to forfeit but being permitted to forfeit for the bankruptcy if it eventuated; or (ii) forfeiting for the rent arrears themselves.

On the other hand, a statutory demand is a formal evidence of indebtedness. The landlord does not have to rely on the continued existence of a tenancy in order to maintain the bankruptcy proceedings, and so, on principle, there appears to be no reason why the landlord should be forced to elect between continuation of those proceedings or waiver of forfeiture.

The final point was dealt with by Lord Justice Mummery in two ways: (i) the point had not been properly relied on at first instance, had not been the subject of permission to appeal and so it would be wrong for the court to entertain it and (ii) the rent arrears on which the statutory demand and petition were based had accrued before the landlord knew of the breach.

On this last point Lord Justice Rix did not agree. In his view if rent that has accrued after a breach of covenant is accepted as rent by a landlord who knows of the breach, that acceptance amounts to a waiver of forfeiture. It does not matter whether the rent accrued before or after the landlord’s knowledge. He felt that the fact that the point was not properly brought on appeal was sufficient to dispose of it.

Where does this leave us? The law of forfeiture will become increasingly important to housing lawyers because the government has shown no interest in raising the £25,000 per annum rent limit for assured tenancies in Schedule 1 of the Housing Act 1988.

In my experience arguments about forfeiture are often run in private possession proceedings. Agents frequently demand (and accept) rent after a breach of covenant. There are often nice questions of timing as to whether waiver took place before or after proceedings had begun. Judges usually seem to be happy to accept that when a cheque has been received by the landlord’s agents waiver takes place at that point, certainly if the cheque has been paid into the agent’s rent account waiver is assumed to have taken place at that point.

Sticking (for the moment) with a strictly logical analysis: either the court is saying that Seahive’s  intention in banking the cheque has relevance (they were intending to repay the difference to the tenant), which would confuse the law considerably introducing a subjective element into the test for waiver; or that the test is applied some time after the cheque is banked to see what the landlord does with the money (in Seahive’s case whether the balance is repaid), which creates awkward questions of timing.

Despite those difficulties I think that the cheque decision is the right one. The tenant had chosen to make a single payment to Seahive and so had created an unusual set of circumstances which the landlord had to deal with. The tenant could not at the same time state a desire to end bankruptcy proceedings (with serious consequences for him as a solicitor) and try to trap the landlord into a waiver of forfeiture.

As to the point of disagreement between Lord Justices Rix and Mummery, it seems to me that Lord Justice Rix has much the better argument. The principle of waiver of forfeiture is based on the principle of election. If a landlord knows of a breach of covenant, they must elect either to continue the lease or to forfeit it, they cannot do both. In my view, a landlord who, knowing of a breach of covenant, accepts rent that has accrued after a breach but before the landlord’s knowledge of the breach is relying on its rights under the lease at a time when a breach had occurred and so is, on the face of it, electing to continue the lease.

Unfortunately Lady Justice Smith expressed no view on the point, so the matter was decided neither way.

The bankruptcy debt point is interesting. To see it more sharply, consider what would have happened had the tenant applied for the statutory demand to be set aside and the petition dismissed on the ground that there was no debt. The landlord would have had to assert that there was a debt – something compatible only with the existence of the lease at the time when the rent accrued. It is arguable (though an argument fraught with difficulty) that that would be a waiver.

Moral: always put your most interesting points into your skeleton argument at first instance, then you have the option of arguing them later on appeal.

Posted in Housing law - All, Leasehold and shared ownership and tagged , , , .

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