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Forfeiture of a peppercorn lease - an option after all?

Posted on 03 July 2019

With the prospect of tenant insolvency a looming issue for many landlords, a recent County Court decision has given some insight as to how accommodating the courts may be in the event of forfeiture of a long lease granted at a premium.

There is a belief that a tenant of a long lease will inevitably be granted relief from forfeiture because courts do not like to see a tenant lose a valuable asset, or for a landlord to obtain a windfall.

SHB Realisations Ltd and GB Europe Management Services Ltd v Cribbs Mall Nominee (1) Ltd and Cribbs Hall Nominee (2) Ltd shows that there are circumstances where a landlord can forfeit a long lease and this option should not be dismissed out of hand.

The landlord sought to forfeit a 125 year peppercorn lease of a BHS store in a shopping centre for breach of a keep open covenant.

The store closed permanently in August 2016 after BHS went into administration. The landlord served a notice of forfeiture in respect of the tenant's breach of its keep open covenant. It was agreed that the breach could not be remedied or complied with in the future. The only option to continue the lease would be an assignment, and the lease had been marketed since June 2016.

In July 2017 the tenant and its mortgagee sought relief from forfeiture for six months to allow time to assign the lease. They claimed that an assignment would be possible, and previous efforts had been hampered by various issues including the ongoing litigation and landlord's planning application to expand the shopping centre.

The landlord counter-claimed for possession, arguing that the 32 months for which the property had been marketed at the date of the hearing was more than adequate to find an assignee.

The decision to grant relief is at the court's discretion. There were various factors to consider here: on forfeiture the mortgagee would lose its security; the breach was not wilful; there was a market of some sort for the lease; and the shopping centre where the store was located seemed to be weathering the retail downturn.

However, the breach of covenant was clearly incurable; the value of the lease had depreciated; there was little genuine interest in the lease; and the landlord would suffer ongoing damage.

The judge granted conditional relief from forfeiture, allowing the tenant three months to find an assignee, failing which the lease would remain forfeit. While the lease had some value, there was no evidence to suggest the market would improve and the court gave little weight to the potential windfall the landlord would receive as a result. Three months would give the tenant a final opportunity to complete an assignment without prolonging matters for the landlord too much longer.

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