Covenants are terms included within a lease agreement, comprising a contract between the tenant and landlord, whether residential or commercial. While there are complexities between explicit and implied, restrictive and positive covenants, the outcome is that breaching any covenant can result in a lease forfeiture situation.
Failure to pay is one of the common covenant breaches in property rental. If a leaseholder fails to pay service charges, ground rent or breaks another covenant outlined in their lease then they stand to be accused of a breach of covenant.
Other covenant breaches, such as subletting or assigning a property without the appropriate permission, can also end in lease forfeiture. Still, landlords have several options – they might opt to continue the lease but begin legal action to enforce the lease terms or claim damages.
In this article, we review what constitutes a breach of covenant in relation to rent payment and key points to be aware of.
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Rights of Forfeiture After a Non-Payment Breach of Covenant
Establishing a breach of covenant is the first stage in a process that can end in forfeiture of a lease, however, the reality in most cases is that breaches will be remedied before reaching that stage.
The accounting provisions set out in the Commonhold and Leasehold Reform Act 2002 states that forfeiture proceedings can be commenced in cases where:
- A landlord has made a formal demand for rent to be paid.
- If ‘small amounts’ of rent, service charge or administration fees have been outstanding for a ‘small period’.
The small amount in question is the sum of up to £350 and a small period spanning 3 years. A landlord cannot add on late payment charges, interest or legal costs to this sum and will be unable to commence with forfeiture proceedings if these limits are not exceeded.
If a breach of covenant relates to non-payment of service charges or other covenants then the process becomes more complicated. The breach of covenant in these cases will need to be determined by a court or tribunal and it must be admitted by the leaseholder.
Even if a decision is made in the landlord’s favour, there will still be a 14-day period where exercising the right of forfeiture is prevented. This delay can be further delayed as a result of appeals.
Related reading: If you’re a commercial landlord, clearviewBI can help to manage corporate tenants in real-time, analysing and generating enhanced visibility into corporate distress and the potential for rent default. This means you can anticipate problem clients before a breach of covenant occurs. You can read more about clearviewBI here.
Legal Compliance for Landlords in Non-Payment Scenarios
The lease will contain information pertaining to what is and is not permitted and will determine whether there has been a breach of covenant. Most leases will show the specific responses to a potential breach of covenant.
For example, commercial landlords commonly include peaceable re-entry clauses, whereby they can reclaim possession of the property due to rental arrears. However, it is essential to follow the correct steps to avoid unnecessary exposure to future legal action.
Note that re-entry clauses are not the same as a right of forfeiture, so the specific covenants and provisions within the lease agreement are important.
Lease Forfeiture Due to Non-Payment
There are defined actions a landlord needs to work through to move forward with a lease forfeiture due to non-payment of rent, or another breach of covenant, as follows:
- The landlord provides a written notice of overdue rent, stating the amount owed, the amount of time rent (or service charges) has been unpaid, and instructions to allow the tenant to bring the rent back up to date.
- Other covenant breaches may mean serving a Section 146 notice, which explains how the lease terms have been breached and offers the chance to make amends as appropriate.
- Section 146 notices are valid if the tenant agrees they have breached a covenant, failed to pay rent, or if a court upholds this position.
- If the tenant does not remedy the breach or pay the rent, the landlord can apply for a court order legally authorising them to proceed with a lease forfeiture.
Landlords must ensure they follow the appropriate process because an attempt to evict a tenant without having the necessary clauses or covenants within the lease that allow this can constitute a criminal offence.
Types of Lease Covenants
Much depends on the nature of the breach of covenant. Unpaid rent is usually a serious overdue amount that has been accumulating for some time – a one-off late payment in an otherwise good tenancy is unlikely to result in the lease being forfeited.
However, landlords should be conscious of the covenants within any lease, both related to what the tenant must do or not do and the landlord’s responsibilities. For example, in freehold lease scenarios, service charges may be dependent on the landlord (or freeholder) upholding their side of the agreement.
There may also be various covenants within one lease agreement, such as:
- Positive covenants, which compel either party to take actions such as keeping up with maintenance or repainting the property within a specific number of years.
- Restrictive covenants state things either party cannot do, such as sub-letting the property, keeping pets, installing certain fixtures or decorations, or causing noise disturbances.
Most commonly, the landlord or freeholder is subject to positive covenants, primarily related to the condition of the property, whereas the leaseholder must comply with negative covenants.
Breaches of Covenants for Landlords
While a breach of covenant could mean a tenant is evicted from the property through a re-entry clause or lease forfeiture, landlords should be mindful of all the covenants in their lease to ensure they uphold their obligations.
Landlords can be exposed to legal action in the same way as a tenant if they breach a covenant, often initiated by leaseholders withholding service charges or even pursuing legal action in more serious scenarios.
It is also the landlord’s responsibility to ensure the leaseholder understands the terms and the covenants within the agreement. Any unusual covenants should be discussed and agreed upon before the lease begins.
Where the lease allows the tenant to sublet all or part of the property, the leaseholder then becomes the landlord in this relationship. They must ensure the tenant complies with all covenants, including rental payments.
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