On 22nd January the Court of Appeal handed down its judgment in the case of Faiz v Burnley Borough Council (2021) EWCA Civ 55.  Judgment dismissing the appeal was given by Lewison LJ; with whom Arnold and Asplin LLJs agreed.  The case came on appeal from the decision of HHJ Halliwell (2020) EWCH 407 (Ch).

The Court set itself two questions to answer:

1. Does acceptance of rent after breach of covenant, with knowledge of that breach, waive the right to forfeit where:
(i) the rent accrued due and was demanded before the landlord had knowledge of the breach; but
(ii) the rent accrued due and was demanded after the breach itself; and
(iii) the landlord accepted the rent after becoming aware of the breach.

2. Was the demand for insurance rent on 4th November 2019 a  new demand after the landlord had acquired knowledge of the breach?

The facts
Burnley Borough Council granted a lease of a cafe at Towneley Hall, an historic house in Lancashire, for a term expiring on 25th March 2020.  The lease was “contracted out” of security of tenure under Part II of the Landlord and Tenant Act 1954 (the 1954 Act).  The lease became vested in Mr Mohammed Faiz and Ms Shakeela Faiz (father and daughter) in 2003.  The lease contained provision for the payment of rent and insurance rent.  The rent was an index-linked amount quantified in the lease and payable on 1st Jan, 1st April, 1st July and 1st October. The insurance rent was payable “within 7 days of demand”.  The lease contained an absolute prohibition on sub-letting, and a forfeiture clause in the event of breach of covenant.

The breach
At some point before 18th October 2019, Mr and Ms Faiz granted a sub-lease to a company called SASSF Limited, in breach of the absolute covenant against sub-letting.  The sub-lease was not contracted out of security of tenure under the 1954 Act. The Council was not aware of the sub-let at the time.  The trial judge had discussed a number of possible dates for the creation of the sub-lease, concluding that, “in all likelihood it was executed prior to late September or early October 2019”.

On 26th September 2019 the Council made a demand for insurance rent, which remained unpaid.  The tenants’ solicitors then wrote to the Council, enclosing a copy of the agreement with the sub tenants.  As the Council was now aware of the breach, on 30th October 2019 it served notice under s. 146 of the Law of Property Act 1925 (the 1925 Act), relying on the sub-lease as the relevant breach of covenant, and saying it could not be remedied.  On 4th November 2019 the Council sent a demand for insurance rent, with a revised amount expressed to cover the period ending on 18th October.  The tenants paid that invoice on 11th November.  On 22nd November the Council purported to forfeit the lease by peaceable re-entry.  The trial judge decided on these facts that the Council had not waived the forfeiture.

The Court of Appeal’s judgment
The Court reviewed settled law on forfeiture. It was well established that demanding rent with knowledge of the relevant breach amounts to a waiver up to the date of the demand.  Until recent statutory changes, only landlords were able to demand rent and a demand for rent proves the existence of a landlord/tenant relationship.  Where a landlord accepts rent accrued due after the date the landlord had knowledge of the breach, this also amounts to a waiver.  However, it is less clear whether the demand and acceptance of rent with knowledge of the breach amounts to waiver if the rent accrued due after the breach, but before the landlord knew the breach had occurred.

At para 26 Lewison LJ goes back to first principles and sets out how the landlord must go about establishing a right to forfeit a lease. The landlord needs to evidence:

– the existence of the lease and terms of the covenant;
– the existence and terms of the forfeiture clause;
– the fact of the breach;
– service of a notice under s.146 of the 1925 Act is good practice, but not essential.  If served, the notice should include information about the tenant’s failure to remedy the breach, or that the breach is irremediable;

The tenant then has the option of defending the allegation by claiming the landlord has waived the right to forfeiture.

The Court first considered the effect of the landlord’s knowledge of the breach having occurred: can a landlord accept rent even after having knowledge of the breach, where the rent had accrued due before the landlord was aware of the breach? The Court said this was possible.  Lewison LJ agreed with Rix LJ’s obiter comments in Osibanjo v Seahive Investments Ltd (2008) EWCA Civ 1282; (2009) 2 P& CR 2.  At para 32 of Seahive, Rix LJ says: “one cannot waive [the right to forfeiture] without knowledge, but once there is the necessary knowledge it should not matter whether the rent which is accepted has accrued due before or after the date of knowledge”.  It is the fact of the breach that entitles the landlord to avoid the lease. Without being aware of the breach the landlord will not seek to exercise forfeiture at all, but the key date is not the date the landlord becomes aware, but rather when the breach occurred.

At para 37, the Court finds that waiver takes place where the landlord demands or accepts rent which accrued due after the date of a breach known to the landlord.  In a case of unlawful sub-letting, the landlord must know not only that sub-letting has taken place, but also that the rent demanded post-dates the breach.  In this case, the Council had not waived its right to forfeiture by its acceptance of the insurance rent, because the payment covered the period before the unlawful sub-let had started.  The tenants had not discharged their burden of proof to show otherwise.

In answer to the question, whether the second demand for insurance rent on 4th November was a fresh demand that accrued after the breach of covenant, the Court found that it was not. The terms of the lease provided for a period of 7 days to pay the insurance rent, but the second invoice for the lower amount required payment on the day it was received; it was therefore not a new invoice generated under the “contractual machinery” of the lease.  It was a revised amount, consistent with the Council’s view that the tenancy was at an end, and not a demand for payment for any continuing tenancy.

Comment
As the Court says in its judgment, forfeiture was a common law principle developed at a time when statutory frameworks for determining tenancies were lacking, and there are technical safeguards as to its use.  The judgment distils useful principles and guidelines as to what each party must do to forfeit a lease or prove waiver of forfeiture.  It suggests that the tenant has to demonstrate more than a purely technical argument as to acceptance of rent once the breach had occurred.  It is also helpful guidance as to what degree of knowledge of the breach the landlord must possess.