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You are here: BAILII >> Databases >> The Law Commission >> Termination of Tenancies for Tenant Default (Consultation Paper) [2004] EWLC 174(4) (15 December 2003) URL: http://www.bailii.org/ew/other/EWLC/2003/174(4).html Cite as: [2004] EWLC 174(4) |
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PART IV
TENANT DEFAULT
4.1 This Consultation Paper contains provisional proposals for a statutory scheme which would provide for termination of a tenancy by the landlord in response to tenant default. Subject to savings for tenancies entered into before legislation comes into force, it will no longer be necessary for the landlord to invoke a forfeiture clause contained in (or a right of re-entry reserved by) the tenancy agreement. Where a tenant default has occurred, the landlord will be entitled to commence proceedings for an order terminating the tenancy, and, in limited circumstances relating to commercial premises, to recover possession unilaterally without prior sanction of the court.4.2 Tenant default is therefore a central component in the scheme which we propose. In this Part we explain what it means. For the most part, it will comprise a breach of covenant or other obligation by the tenant, including non-payment of rent.
4.3 There are several substantive respects in which our proposals differ from the recommendations contained in Parts V to VII of the First Report. We have replaced the terminology used in that Report of the "termination order event" (as the ground on which termination proceedings would be based). We believe its retention in the light of our proposals for unilateral recovery of possession without an order of the court would be misleading. We now use the phrase "tenant default". We are putting out to consultation the future of the doctrine of waiver, which we believe is both unnecessary and unprincipled, and we provisionally propose its abolition. We have also re-considered our recommendations on the termination of tenancies in response to tenant insolvency in the light of the legislative changes effected to the law of corporate administration and company voluntary arrangements ("CVAs") by the Insolvency Act 2000 and the Enterprise Act 2002. The main discussion of this issue is set out in Part X below.
Breaches of covenant
New tenancies
4.4 The First Report recommended that all breaches of covenant contained in tenancies granted after the date implementing legislation came into force should automatically be "termination order events", or what we would now call tenant default.[1] There would no longer be any need, therefore, to include as a matter of course in a tenancy agreement a forfeiture clause or a right of re-entry. This would "shorten tenancy documents by obviating the need for a piece of verbiage which is at present included, in nearly every case, as a matter of course."[2] We have no hesitation in endorsing this recommendation.4.5 Breach of both express and implied covenants would comprise tenant default.[3] All obligations owed by the tenant to the landlord, whether they are expressly undertaken or implied at common law or by statute, would be included within the definition of covenants.
4.6 It will be open to the landlord and tenant to agree that certain covenants should not, if broken, comprise tenant default for these purposes. It will indeed be possible for them to agree that no breach of covenant of the tenancy shall activate the statutory scheme, in effect excluding the scheme. Grant of a tenancy on such a basis would be a matter for free negotiation between the parties, and the flexibility enjoyed by the tenant as a consequence would be reflected in the terms agreed. In the interests of clarity, we should emphasise that in excluding the statutory scheme in its entirety, the landlord and tenant would not thereby resurrect a right of forfeiture or re-entry (as if under the current law). We are proposing the abolition of forfeiture and its replacement by the statutory scheme.
Existing tenancies
4.7 The scheme is intended to apply to all tenancies, including those granted prior to the legislation coming into force. If such a tenancy does not contain a forfeiture clause, it follows that the landlord has no current right to forfeit the tenancy in the event of breach of covenant. We do not see why the landlord's rights should be materially enhanced by the inception of a new legislative scheme: indeed we consider that the concomitant depletion of the tenant's security could result in a successful complaint pursuant to Article 1 of the First Protocol of the European Convention for the Protection of Human Rights and Fundamental Freedoms.[4]4.8 In the First Report, the Commission recommended that, in relation to tenancies granted prior to the date of any implementing legislation, breaches of covenant should be termination order events only if the covenant in question was the subject of such a forfeiture clause.[5] We endorse that recommendation, as we do those analogous recommendations which relate to tenancies granted after the operative date but pursuant to a binding obligation entered into before it.[6]
"Disguising" breaches of covenant
4.9 It would be seriously prejudicial to the interests of tenants if landlords were entitled to "by-pass the scheme for termination orders by framing a tenancy in such a way that what is in reality a breach of covenant becomes something else in law".[7] Two possibilities were mooted in the First Report:
(1) the grant of a tenancy "on condition that" the tenant did or did not do something; or
4.10 We explained in the First Report that tenancies may be granted subject to a condition or limitation which does not in any way impute fault to the tenant. We gave the example of the creation of a tenancy for seven years upon condition that planning permission was not granted during that time. The grant of planning permission would be a "neutral" event which should not be within the termination order scheme. Where, however, the event which activates the condition or limitation is an act or omission of the tenant connoting fault on his or her part, it is important to ensure that the termination order scheme is engaged. The First Report recommended an elaborate provision appending a non-exhaustive list of events which would be deemed to constitute "termination order events".[8](2) the grant of a tenancy which "continued" only until the tenant acted, or failed to act, in a similar way.
4.11 On re-consideration by the Commission, the opportunity was taken to adopt a more focussed formulation to deal with this problem, and we are broadly in favour of the approach adopted in clause 7 of the 1994 Bill.[9] In effect, where an "event" is occasioned, directly or indirectly, by an act or omission of the tenant (or anyone deriving title under him, or a tenant's surety), and under the terms of the tenancy occurrence of that "event" causes the tenancy to determine or confers the right on the landlord to determine the tenancy (or to require its surrender or its assignment to a person nominated by the landlord), then that event would comprise tenant default.
4.12 One issue which does not appear to have been addressed to date is whether the provisions ensuring that tenancies granted upon condition or subject to a limitation should operate in relation to tenancies granted before any implementing legislation comes into force, or only in relation to tenancies granted subsequently. It is our considered view that they should not apply retrospectively. Were they to do so, landlords could complain, with some justification, that they would be required to employ the termination order scheme in circumstances where they would not have been required to comply with the current statutory procedures.[10]
Special considerations
Non-payment of rent
4.13 The First Report recommended the repeal of those statutory provisions requiring the landlord to make a formal demand for the rent prior to forfeiting the tenancy for non-payment of rent.[11]4.14 We endorse the recommendation made in the First Report that as a general rule non-payment of rent for 21 days after it has become due should comprise tenant default. If the tenancy contains a term dispensing with a rent demand which provides for a period different from 21 days, the different period should apply.
4.15 Although there will be no statutory requirement that the landlord should demand the rent prior to commencing termination order proceedings, we should emphasise two important points. First, it will be open to the parties to make provision in the tenancy agreement that the landlord must make a formal demand for rent prior to commencing proceedings (or prior to serving a pre-action notice). Secondly, under the pre-action notice procedure which we explain in Part V below, the landlord may be required to ask the tenant to remedy the breach of covenant of which complaint is being made. Where that breach comprises non-payment of rent, this will in effect require the landlord to demand payment of the rent prior to commencing termination order proceedings.
Denial of title
4.16 We agree with the First Report that the implied term that a tenant should not deny or disclaim his or her landlord's title is an unnecessary vestige of feudalism, and has no place in the modern law. It should therefore cease to be an implied term. It should remain open for parties to include, and to enforce as breaches of covenant, express terms to this effect if they so wish.[12]
Severance of the tenancy
4.17 We also agree that severance of the tenancy should not result in the tenant being vulnerable to a termination action where the default is that of a person who only enjoys a tenancy of part of the demised premises.[13] If T, the original tenant, assigns one part of the premises to A, and another part of the premises to B, a breach of obligation by B should not entitle L the landlord to terminate A's tenancy. The same would apply if T had retained possession of half the premises and assigned half to B - T's tenancy should remain immune.4.18 The example pre-supposes that the assignments are not themselves in breach of a covenant in the head tenancy. If they were, then L would of course be able to bring termination order proceedings (effective against both A and B) in response to the tenant default comprising the breach of the covenant against assignment.
Should there be exceptions?
4.19 Part V of the First Report analyses in some depth the various exceptional circumstances in which, under the current law, the tenant cannot claim relief. There is nothing which we can usefully add to this discussion. The case for simplification would be clearly advanced by removing unnecessary and in some cases obsolete exceptions from the general jurisdiction. We therefore support the recommendation (subject only to modifications to deal with our proposed changes in terminology) that all circumstances falling within the general definition of tenant default should attract the court's discretionary powers to grant relief. There should be no counterpart of the existing exceptions to the court's relief-giving powers under sections 146(8)-(10) of the Law of Property Act 1925.[14]
Remedied breaches
4.20 The First Report recommended that a "termination order event" should generally remain available as a ground for a termination order despite the fact that its consequences may have been remedied.[15] In effect, the court should be given power to terminate a tenancy even though the breach of covenant or other tenant default which gave rise to the landlord's application has been put right.4.21 The proposed scheme seeks to remove the distinction between covenants to pay rent and other covenants. Remediability as such has been of significance only in relation to other covenants, as the landlord's statutory notice under section 146 of the Law of Property Act 1925 must require the tenant to remedy such breaches as are "capable of remedy" or "remediable". The issue of remediability has been extensively litigated, and yet it remains difficult to decide whether a given breach is capable of remedy. It is however an essential question. If the breach is remediable, and the landlord fails to require that it be remedied, the section 146 notice will be invalid. If a tenant remedies a breach as requested, the forfeiture proceedings will be forestalled. If a tenant fails to remedy the breach, the court still has discretion to grant relief.
4.22 Where a landlord forfeits for non-payment of rent, there is no requirement that the landlord request that the tenant remedy the breach. The section 146 procedure does not apply. It is however necessary that the landlord make a formal demand for the rent prior to forfeiture save where the tenancy (as is usual) contains express provision dispensing with this requirement.[16] By a complex combination of statutory provisions, general effect is given to the principle that where a tenant pays the rent arrears, interest and costs, the landlord will not be entitled to forfeit the tenancy.[17]
4.23 The termination orders scheme is intended to apply in relation to all types of covenant. It would be possible to promulgate a general rule that where a tenant remedied any breach of covenant, including a covenant to pay the rent, the landlord should not be able to terminate the tenancy on the basis of that default. We agree with the First Report, however, that this would have the potential to cause considerable unfairness to landlords. In particular where non-payment of rent is concerned, persistent lateness in compliance with the obligations of the tenancy, putting financial strain on the landlord and requiring the landlord to chase up the tenant, may justify the landlord in seeking termination of the tenancy.[18] There may be other circumstances where despite the tenant putting right the particular breach of covenant, the landlord should be entitled to terminate the tenancy.[19]
4.24 We therefore support the recommendation that a breach of covenant should continue to be treated as tenant default despite the fact that its consequences have been remedied by the tenant. The tenant's actions in remedying the breach will remain highly significant when the court considers whether it should or should not grant the order sought by the landlord. But the fact that the breach has been remedied should not deny the court jurisdiction to make a termination order.
4.25 As we shall explain in Part VI, there will be two forms of termination order available to the court on application by the landlord: an absolute order and a remedial order. Where the breach has already been remedied by the tenant, the only form of termination order which the landlord may seek will be an absolute termination order (there being nothing outstanding for the tenant to remedy). The court will be engaged in a two stage process. First the landlord must satisfy the court of the tenant default. Secondly, the court must be satisfied that the conditions for making an absolute termination order are fulfilled. In brief, an absolute termination order will only be granted where the court is satisfied, by reason of the seriousness and/or frequency of the tenant default, that the tenant is so unsatisfactory a tenant that he ought not in the circumstances remain tenant of the property. Where a tenant has remedied the default in question, the court may therefore still make an absolute termination order.
4.26 We do not however intend that landlords should be free to use breaches of covenant which have been remedied by the tenant long ago to be the pretext for an attempt to terminate the tenancy. It is essential, not only to deal with this possible mischief but also in view of our proposals regarding waiver, that there are strict time limits within which the landlord must act. These are explained more fully in Part V below, but in brief the landlord will be expected to serve a pre-action notice on the tenant indicating an intention to terminate (or unilaterally to recover possession) within six months of the date on which the landlord acquired knowledge of the tenant default. Once that period has expired without a notice being served, the breach will be viewed as "spent". The landlord will not be able to base a claim to terminate (or unilaterally to recover possession) on a spent breach, although it will be open to the landlord to cite spent breaches as evidence of the frequency of the tenant's default.[20]
Waiver
4.27 Waiver occurs if the landlord, being aware of the facts which constitute the ground in question, does some unequivocal act recognising the continued existence of the tenancy. It is a particularly difficult and technical aspect of the current law of forfeiture which has been the subject of frequent criticism. As we said in the First Report:
4.28 As the First Report explains, waiver is intimately associated with the common law doctrine of re-entry. If the landlord who re-enters thereupon terminates the tenancy with immediate effect, any subsequent dealing with the former tenant as tenant will be deemed to comprise an admission that the tenancy continues to exist. Making a rent demand, or accepting rent tendered, has the likely consequence of waiving the breach and affirming the tenancy even though both parties are perfectly aware that that is not the intention of the landlord. As a result, the landlord has to proceed with extreme care and to ensure that all future dealings with the (former) tenant are on the basis that the tenancy has been ended and that he or she is nothing more than a trespasser.The place occupied by waiver in the general law is not well-defined overlapping as it does with other related concepts. Nor are its principles easy to state concisely or with certainty. But those aspects of it which are reflected in the rule stated above are designed, very broadly, to prevent someone from taking up two inconsistent positions. He cannot be allowed to approbate and to reprobate. So it is said that if a landlord, with knowledge of a ground for forfeiture, demands or accepts rent accrued due since the ground arose, he waives his right to forfeit on that ground.[21]
4.29 The abolition of the doctrine of re-entry should logically see the demise of the doctrine of waiver. If the effect of commencement of termination order proceedings, or of exercise of the landlord's unilateral right to recover possession, is not immediately to terminate the tenancy, there seems no basis on which waiver should be given any future credence. The tenancy would continue in existence until such time as the court orders that its termination should take effect, or, in the case of unilateral recovery of possession, until the period of one month elapses following the landlord's exercise of the right. In demanding or accepting rent, or some other performance of a tenant obligation, the landlord is doing no more than requesting, or receiving, what he or she is entitled to under the terms of the contract which remains in existence between the landlord and the tenant.
4.30 The First Report did not however deliver the quietus to waiver which we think it deserves and which we believe the proposed scheme can offer. The Commission recommended in that Report that waiver should be retained, albeit in a somewhat muted form:
4.31 We accept that a landlord who has misled the tenant into believing that the tenancy will not be terminated should be given short shrift by the court (in appropriate circumstances). It is very clear, however, that the circumstances in which waiver may be argued can be extremely diverse, and that there is a real danger that the preservation of this technical doctrine in anything approximating its current form will simply encourage tenants and their advisers to raise the point. Indeed, the Commission itself appeared to acknowledge the real problems in re-formulating waiver - that it "might sometimes be more difficult to apply in practice than the present rule which, though in our view it often gives the wrong result, is at least comparatively short and simple."[23]A termination order event should be regarded as waived if, and only if, the landlord's conduct, after he has knowledge of the event, is such that it would lead a reasonable tenant to believe, and does in fact lead the actual tenant to believe, that he will not seek a termination order on the ground of that event.[22]
4.32 We believe that it would contribute greatly to the simplification of this area of the law if the doctrine of waiver could be abolished in its entirety. We consider that an approach which could more usefully be adopted is one similar to that which we are recommending in relation to "remedied" breaches. As we have explained above, we believe that a breach of covenant should continue to comprise tenant default although its consequences have been remedied. The remedying of the breach would however be a matter to which the court should have regard in deciding whether to grant a termination order. Likewise, instead of a single rule that a breach, once waived, cannot comprise the basis of an action to terminate the tenancy, it would be possible to require the court, in deciding whether to make a termination order, or whether to grant an application for relief by a member of the derivative class, to take into account the conduct of the landlord before and during the proceedings. Where that conduct has led the tenant to believe, on reasonable grounds, that the landlord will not seek to terminate the tenancy in response to the particular default, then the court will be unlikely to grant a termination order.
Tenant insolvency
4.33 It is very common for a tenancy agreement to provide that the landlord may determine the tenancy on the tenant's bankruptcy (if an individual) or liquidation (or equivalent, if a company) or on the occurrence of other events which are associated with tenant insolvency. The exercise of forfeiture in such circumstances, particularly but not exclusively by physical re-entry, may be controversial, as it confers on the landlord a potentially unfair advantage over other creditors as well as removing what may be an extremely valuable asset from the insolvency proceedings.4.34 The question arises whether we should provide that an act of insolvency by the tenant (or by a tenant surety on whom the landlord may be heavily reliant) should in itself comprise tenant default entitling the landlord to terminate the tenancy. The First Report recommended that the landlord should be entitled to terminate in response to tenant insolvency, and that tenant insolvency should be a "termination order event". The 1994 Bill made provision accordingly[24].
4.35 There are now very extensive statutory restrictions both on the exercise of physical re-entry and the commencement of forfeiture proceedings where the tenant has become insolvent. It is strongly arguable that expressly to state that tenant insolvency can comprise tenant default such as to trigger termination by the landlord would be inconsistent in terms of policy and would create the potential for confusion. If, in the great majority of cases, the landlord will not be able to act upon the insolvency of the tenant owing to statutory restrictions, there appears to be little point in providing that tenant insolvency should comprise tenant default. It should also be realised that in almost all cases where the tenant is insolvent the landlord will be able to establish tenant default without relying upon the insolvency itself. Insolvent tenants, as a general rule, do not pay their rent. The statutory restrictions on action against insolvent tenants apply of course irrespective of the ground upon which the landlord is basing the claim.
4.36 We realise that the inter-relationship between termination order proceedings and insolvency is peculiarly troublesome, and we set out much more fully in Part X the difficulties we have identified and the means we consider to be most appropriate to address them. We have taken the view that tenant insolvency (as defined) should not be included within the definition of tenant default. If the tenant becomes insolvent (whether before the landlord instigates the termination process or during the termination order proceedings) then the landlord's right to terminate the tenancy should be subject to the statutory restrictions contained in the insolvency legislation.
Summary of provisional proposals in this Part
Function of Tenant Default
(1) Grounds on which the landlord may base an application for a termination order (or recover possession unilaterally of commercial premises) may conveniently be called "tenant default".
Breaches of covenant
(2) All breaches of covenant by the tenant should comprise "tenant default" save and in so far as the tenancy expressly stipulates that the particular breach or breaches does not do so.
(3) Although under the present law breaches of covenant are grounds for forfeiture only if they are expressly made so by the inclusion in the tenancy of a "forfeiture clause", no such special provision should be necessary to make them comprise tenant default. But:
(a) This should not apply to tenancies granted before the date on which the implementing legislation comes into force: in such tenancies a breach of covenant should comprise tenant default only if covered by a forfeiture clause.
(b) If a tenancy, though granted after that date, is granted in pursuance of a binding obligation in existence before that date, and the obligation was such that a forfeiture clause was not to be included (or was not to be included in relation to some of the tenant's covenants) then the obligation should be interpreted as requiring the inclusion of an express term excluding the termination order scheme in relation to the tenant's covenants (or some of them as the case may be).
(c) Where an obligation entered into before the date on which the implementing legislation comes into force was such that a forfeiture clause was to be included in a tenancy granted after that date, that requirement should be treated as fulfilled if the tenancy maintains silence on the point, so allowing breaches of covenant to comprise tenant default.
(d) Tenant insolvency of itself shall not comprise tenant default.
Disguised breaches of covenant
(4) "Tenant default" should also include all events on the happening of which the tenancy (whether through the inclusion of a condition or limitation or for any other reason) is to cease (whether immediately or after a period) or the landlord is to have the right (whether or not on notice) to apply for a termination order, to forfeit the tenancy or to bring it to an end in any other way or to require its surrender or its assignment to a person nominated or to be nominated by him.
Non-payment of rent
(5) Non-payment of rent should comprise "tenant default" without formal demand after 21 days (whether or not there is a dispensing term) - unless the tenancy provides for a period different from 21 days, in which case the different period should apply.
(6) The above proposal should apply whether the tenancy is granted before or after the coming into force of the implementing legislation.
Denial of title
(7) In tenancies granted after the implementing legislation comes into force, there should no longer be an implied term to the effect that the tenant should not deny or disclaim the landlord's title; and any such term implied in a tenancy granted before that time should be ineffective. This should not prevent the inclusion of (or render ineffective) any express term to similar effect.
Severance of the tenancy
(8) If parts of premises originally held as a whole under a single tenancy have been the subject of separate assignments to different people, a tenant of any one part should be at risk of termination proceedings in respect only of tenant default occurring in relation to that part.
Should there be exceptions?
(9) All events falling within the general definition of "tenant default" should attract the court's discretionary powers which correspond with its power to grant relief under the present law. (The existing exceptions to the court's relief-giving powers under section 146(8)-(10) of the Law of Property Act 1925 should have no counterpart in the proposed scheme.)
Remedied breaches
(10) Tenant default should generally remain available as a ground for a termination order despite the fact that its consequences may have been remedied. In determining whether to grant a termination order on application by the landlord, the court should be required to take account of the tenant's conduct before and in the course of the proceedings, including whether and to what extent the tenant has remedied the consequences of the tenant default on which the application is based.
Waiver
(11) The doctrine of waiver as such should be abolished. In determining whether to grant a termination order on application by the landlord, the court should be required to take account of the landlord's conduct before and in the course of the proceedings, including whether that conduct has been such as to lead the tenant reasonably to believe that the landlord would not seek termination of the tenancy.
Note 1 First Report, para 5.3, Recommendation (11). [Back] Note 4 As incorporated into domestic law by the Human Rights Act 1998. [Back] Note 5 First Report, para 5.6, Recommendation (12)(a). [Back] Note 6 First Report, paras 5.7 to 5.9, Recommendation (12)(b). [Back] Note 7 Ibid, para 5.10. [Back] Note 8 Ibid, para 5.18, Recommendation (14). [Back] Note 9 See 1994 Bill, commentary at paras 2.1 to 2.5. [Back] Note 10 Those procedures do apply to a limited range of circumstances: see Law of Property Act 1925, s 146(1), which applies to a right of re-entry or forfeiture for breach of any condition, and s 146(7), dealing with leases limited to continue only as long as the lessee abstains from committing a breach of covenant. [Back] Note 11 First Report, paras 5.21 - 5.26, Recommendations (16) and (17). [Back] Note 12 First Report, paras 5.32 - 5.35, Recommendation (18). [Back] Note 13 First Report, paras 5.36 - 5.38, Recommendation (19). The example in para 5.38 of the First Report must now be read subject to the legislative changes effected by the Landlord and Tenant (Covenants) Act 1995. If the tenancy was a “new tenancy” within section 1 of that Act (that is, subject to transitional circumstances, was granted on or after 1 January 1996), the original tenant T would be released on a lawful assignment of the term: s 5. Breach by A would not render T liable to lose that part of the premises retained by him as T would no longer be liable under the covenants of the tenancy. [Back] Note 14 First Report, paras 5.39 - 5.57, Recommendation (20). [Back] Note 15 First Report, Part VII, Recommendation (24). [Back] Note 16 Common Law Procedure Act 1852, s 210 . There is also exception made where half a year’s rent is in arrear and there are not sufficient goods to be found on the premises available for distress. [Back] Note 17 See Part II above. [Back] Note 18 Persistent non-payment of rent is a discretionary ground for possession in relation to assured tenancies (Housing Act 1988, Sched 2, Ground 11). It is also a ground on which a landlord may oppose the grant of a new business tenancy (Landlord and Tenant Act 1954, s 30(1)(b)). [Back] Note 19 The First Report gives as an example breach of a repairing covenant which, although ultimately remedied, persisted for a long time despite the protests of the landlord and resulted in the property becoming dangerous: see para 7.11. [Back] Note 20 See Part VI for the circumstances in which the court may make a termination order. [Back] Note 21 First Report, para 6.3. [Back] Note 22 First Report, para 6.8 and Recommendation (21). Recommendation (22) adds that if the event is a continuing breach of covenant it should be a question of fact whether and how far the landlord has led the tenant reasonably to believe that he has waived it for the future as well as for the past. Recommendation (23) contemplates the possibility of future waiver. [Back] Note 23 First Report, para 6.11. [Back] Note 24 First Report, paras 5.19 - 5.20, Recommendation (15); 1994 Bill cls 7, 42(2). [Back]
