Lawbite: Mixed-use buildings and forfeiture – a bitter-sweet outcome for the residential tenants

Summary

This recent appeal to a Circuit Judge in the County Court highlights the difficulties that can arise where a head lease of a mixed-use building is forfeited and sub-tenants of part seek relief. 

It is clear from this decision that, when applying its discretion as to the terms of any relief granted, the Court will place a strong emphasis on putting the landlord back in the position it would have been in had forfeiture not occurred. That is the case even if that outcome is not a particularly favourable one for the sub-tenant, in this case residential sub-tenants.

The decision is important due to the shortage of authority where it comes to relief applications brought by sub-tenants of part, particularly in the context of a mixed-use building. This decision will be of particular interest to Landlords and tenants of mixed use buildings in England and Wales.

The building

The claim related to the prominent West Africa House, 25 Water St, Liverpool (the “Building”). A head lease of the entirety of this mixed-use Building was granted to Signature Living Hotel Limited (“Signature Living”). Sitting under the head lease were:

• two sub-leases which demised the commercial parts of the Building
• a third sublease of several floors containing residential apartments. Those apartments were sub-underlet to individual residential tenants

Forfeiture

Signature Living’s head lease was forfeited for non-payment of rent after Signature Living entered into administration and fell into arrears of rent. Forfeiture of the head lease automatically led to all of the sub-leases also being terminated.

The residential tenants and their mortgagees applied for relief from forfeiture under s.146(4) of the Law and Property Act 1925 and sought a new head lease of only the residential flats (not the commercial units).  

Whilst the freeholder did not object to relief being granted, it argued that the new lease should be of the whole of the building, mirroring the forfeited headlease. 

At the first instance, the Court found in favour of the freeholder. Relief was granted conditional upon the sub-tenants paying all the arrears.  A new lease was vested to the residential sub-tenant on the same terms as the forfeited head lease save that the term should be equivalent to the unexpired term of the residential sub-lease. In this appeal, the Circuit Judge agreed with the Judge, finding that she had not erred at law and had acted within the remit of her discretion.  

The Court's reasoning

The key message from the court is that the starting point should be that the freeholder, as landlord, should be put back in the same position as it was in prior to the breach giving rise to the forfeiture.  

In this case, this aim was best achieved by vesting a lease of the whole of the Building to the residential sub-tenants. Its terms to be the same as the forfeited headlease to Signature Living save as to term.

Vesting a new lease of only part of the building would have left the landlord in a worse position than it was in before the forfeiture. It would, for example, have taken on repairing and insuring obligations previously held by Signature Living as landlord in the head lease. The freeholder would have also been subjected to obligations which it had not been subjected to previously under the Building Safety Act 2022 (“2022 Act”). Crucially, the freeholder would have been an “Accountable Person” for the 2022 Act, which would have entailed the freeholder assuming a number of stringent responsibilities in respect of the fire safety of the Building.

The order granted sees the residential sub-tenants become the landlord of the commercial units within the Building, acquiring the repairing obligations for the Building and also needing to pay the head lease rent in full. The Court reasoned, however, that the residential tenants could assign the new head lease to a new management company which could then grant new residential sub-leases to the residential apartment tenants.  

Key points

• The starting point in claims for relief from forfeiture is that the landlord should be put back into the same position it was in prior to the breach giving rise to the forfeiture.  It is from that point that the court’s wide discretion under s.146 Law of Property Act 1925 should then be exercised 
• In this case, the additional Accountable Person responsibilities which the freeholder would have been subject to under the 2022 Act significantly impacted the Court’s decision 
• Residential tenants should beware when entering into a long residential sub-lease granted at a premium where the head lease reserves a large rent. If the head lease is forfeit and the sub-tenants need to seek relief, they are likely to need to meet the costs of significant rent arrears as a condition of securing relief
• We understand that the residential sub-tenants have sought permission to appeal