Waiving without knowledge?

This article looks at the recent Court of Appeal decision in Faiz v Burnley BC [2021] EWCA Civ 55. The case concerned the principle of “waiver” as applied to a landlord’s right to forfeit a commercial lease.

Waiver

Many commercial leases entitle a landlord to forfeit a lease in the event that a tenant breaches a covenant (ie. term) of the lease. If the tenant subsequently breaches a covenant, the landlord can then forfeit the lease or “waive” their right. A landlord waives the right to forfeit by performing an unequivocal act that recognises the continued existence of the lease. For example, accepting a tenant’s payment of rent for a period of occupation after the date of the breach would constitute a waiver because the landlord is acting as if the lease has continued to operate after the breach of covenant. Equally, accepting rent that was due before the breach occurred is not inconsistence with the discontinuance of a lease after the breach and so would not constitute a waiver.

Facts

In Faiz v Burnley BC, the commercial lease included a covenant that prohibited the tenant from subletting the premises.

On 26 September 2019, the Landlord made an insurance rent demand for the period of 1 April 2019 to 25 February 2020. The sum demanded was £2,845,20. Under the terms of the lease, the tenant was obligated to pay insurance rent within 7 days of an insurance rent demand. Accordingly, the insurance rent fell due on 2 October. The tenant did not pay the demanded sum.

At some point before 18 October 2019 and in breach of covenant, the tenant sublet the premises. On 18 October, the landlord found out and served a s146 notice (ie. a notice stating that the landlord wished to commence forfeiture proceedings). On 4 November 2019, the landlord made a second insurance rent demand. The sum demanded was £1,826.87 and had been adjusted so as to only encompass the period of 1 April 2019 to 18 October 2019. On 11 November 2019, the tenant paid the insurance rent.

On 11 November 2019, the landlord re-entered the premises and purported to forfeit the lease.

Issue

Had the landlord’s acceptance of the tenant’s (adjusted) insurance rent payment constituted a waiver of the landlord’s right to forfeit?

Decision

The Court of Appeal held that the landlord had not waived their right to forfeit.

Reasoning

As explained above, if a tenant breaches a covenant giving rise to the right to forfeit, the landlord can forfeit the lease or waive their right. The landlord waives their right to forfeit by acting in such a way as to treat the lease as continuing. It must also be the case that the landlord knows about the breach: the landlord cannot forfeit a right that it did not know it had.

But what about a situation where the landlord knew about the breach and demanded that the tenant pay rent falling due after the breach occurred, but the landlord demanded the rent (or the rent fell due) before the landlord knew about the breach? In this situation, the landlord’s conduct is consistent with a continuation of the lease (for the landlord demanded rent for a period post-dating the breach), but is only accepting rent that was demanded before it became aware of the breach.

The Court’s answer to this question was as follows. The right to forfeiture arises on a breach of covenant, the date on which the landlord becomes aware of the breach is therefore irrelevant. Accordingly, the issue to be determined is (only) whether the rent accepted by the landlord fell due after the date of the breach – not whether the landlord knew about the breach before it made the rental demand. A landlord will only have waived its right to forfeit if, when demanding/accepting the rent, the landlord knew that the rent being demanded/accepted fell due after the breach occurred.

In the present case, the landlord’s acceptance of the insurance rent did not constitute a waiver for two reasons. First, the insurance rent fell due on 2 October 2019. The date of breach was unclear, but the Court found that that the unlawful subletting occurred in early October 2019, which would “encompass a date after 2 October”. Accordingly, the Court concluded that the breach occurred after the insurance rent fell due. The landlord’s acceptance of the rent was therefore consistent with a forfeiture of the lease. Second, the landlord only had knowledge of the breach on 18 October – after the date on which the insurance rent was demanded. The landlord could not have waived a right to forfeit that it did not know had arisen (because it did not know about the breach).

But what about the second demand that was made on 4 November? The tenant argued that the insurance rent fell due on 11 November (ie. 7 days after the second demand). Seemingly, then, the insurance rent fell due after the unlawful sub-letting and after the landlord was aware of the breach. The Court disagreed: the 4 November demand did not amount to a fresh demand for insurance rent due under the lease – rather, it was an indication by the landlord to the tenant that it was willing to accept a lower sum than had been previously demanded. Furthermore, the landlord believed that it was demanding (and accepting) rent that fell due on 2 October (ie. before the date of the breach).

Conclusion

This case provides landlords with a cautionary tale on the complexity of “waiver” principles and the importance of seeking expert legal advice before purporting to forfeit a lease.

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