Forfeiture: Whether an agreement to accept forfeiture prevented a tenant from later applying for relief (Chug v Dhaliwal – 2023)

Where a landlord and tenant reached an agreement to forfeit a lease, did such an agreement prevent the tenant from making a subsequent application for relief from forfeiture?

The background

In Chug v Dhaliwal [2023], the landlord (Dhaliwal) granted a 20-year lease of a shop in Hounslow, London, to the tenant (Chug), who ran a homeware shop. The lease contained a standard alienation covenant on the part of the tenant not to part with possession of the property, or to suffer another party occupying the whole or part of it.

The tenant sold the business to a third party who continued to run the shop through his own company, The Essential Homewares Ltd. The lease was not assigned, and the landlord gave no consent to an assignment. The landlord became aware of the occupation of the shop by the third party and served a s.146 notice under the Law of Property Act 1925 to forfeit the lease, citing arrears of rent and breach of the alienation clause. The landlord, acting through bailiff agents, then peacefully re-entered the premises.

Following discussion, the landlord agreed not to pursue a claim for dilapidations in exchange for the tenant’s acceptance of the forfeiture of the lease. The landlord was unable to agree terms with the third party for a new lease, re-entered the premises again and regained possession from Essential Homewares.

The tenant and Essential Homewares applied for a declaration to state either that the first re-entry had been unlawful, or for relief from forfeiture. All claims were rejected at first instance. The tenant and Essential Homewares appealed to the High Court on grounds that:

1. At the time of re-entry there had been no breaches of the lease;
2. The s.146 notice was defective; and
3. The refusal to grant relief at first instance was unreasonable.

The decision

The High Court dismissed the appeal on all grounds, finding that:

1. The agreement made between the landlord and the tenant following the initial re-entry stated that the parties ‘agreed to set aside any further claims in respect of the property’. The agreement therefore settled the tenant’s argument that the re-entry had been unlawful;
2. Similarly, the agreement to set aside any further claims settled arguments as to the validity of the s.146 notice; and
3. By completing the agreement, the tenant had given up his right to seek relief from forfeiture. Refusal by the court to grant relief had been a reasonable conclusion to reach on the basis of the agreement entered into between the parties.

The tenant had argued that the landlord had waived his right to forfeit by accepting rent. The court disagreed, distinguishing an immediate breach – for example, the non-payment of rent – and continuing breaches, such as the sharing of occupation with a third party, where breaches of covenant occur daily.

Advice and action for landlords

This decision reaches the straightforward conclusion that an agreement between a landlord and tenant, whereby forfeiture is accepted by the tenant in exchange for the landlord taking no further action in respect of breaches such as dilapidations, and where the parties expressly state that further claims are set aside, settles any further complaint or action in respect of the property, including a claim for relief from forfeiture.

Both landlords and tenants are advised to ensure that property interests are properly addressed as part of any business assignment. The litigation in this case could have been easily avoided by the tenant making a simple application for consent to assign the lease.