Housing Minister Matthew Pennycook’s November 2024 statement makes a further promise to reform the law of forfeiture as it affects residential leases.
We know from the passage of the Leasehold and Freehold Reform Act 2024 (‘LAFRA’) (and the amendments tabled by Mr Pennycook when he was in opposition during the reading of the Act in the House of Lords) that this is something about which he feels passionately. However, the suggestion of reform of the law in this area is nothing new - indeed, the Law Commission prepared a report on the topic in 2006.
What is forfeiture?
Simply put, forfeiture is the right of the freeholder to bring a lease to an end for a fundamental breach of lease. Examples include non-payment of rent or a fundamental breach of covenant under the lease (e.g. illegal use or subletting). In the commercial context these rights don’t of themselves seem unduly harsh. After all, would you expect a commercial tenant of a shop that didn’t pay their rent to be able to continue to occupy the premises indefinitely? Likewise, if a flat is being used as a crack-den, and the long-leaseholder is either complicit in this or doesn’t take action against this, there should be a suitably ‘big stick’ and ultimately, it is right for the freeholder to take the property back.
What is the issue?
One fundamental issue – particularly with a long leasehold - is that the leaseholder will receive nothing back if the lease is forfeited. Contrast this with the position where, for instance, there is a mortgage default. Here the lender can step in, sell the property and remove the owner, who would get back any remaining equity in the property less the debts and the costs incurred.
With a commercial lease the concerns may be different as bringing a shorter-term interest to an end may well be the ‘right’ thing to do to get the property back. Here, the landlord can mitigate some of their losses by re-letting the property. With a long lease there is, perhaps, an unexpected ‘windfall.’
In such a short article there is not space to go into the full details of the options for reform; in summary, proposals would replace the right to bring the lease to an end for a residential property with a range of options – enforced by the court – which might include an order for sale, or other requirements – including the possibility of bringing the lease to an end in extreme circumstances.
There would also be an option for the court to make an order for sale with the proceeds being distributed as the court specifies. This would mean that the defaulting leaseholder might get some of their equity in the property back.
What is the concern with small payments – particularly in relation to long leases?
Currently, there is nothing to stop the freeholder issuing proceedings for forfeiture – where the debt is rent arrears, this includes ground rent, which, in comparison to the value of the property itself, is likely to be a relatively small amount.
The only restrictions are those imposed by the Commonhold and Leasehold Reform Act 2002 which limits this to amounts of £350 that have been owing for more than three years.
Is this a real concern?
In practice, examples of forfeiture are rare. Statistics suggest that there are perhaps fewer than 100 cases in any given year.
How has the debate around forfeiture unfolded?
The first attempt to remove freeholders’ right to forfeiture was introduced to the House of Lords by Lord Young of Cookham in December 2022. However, the Bill did not move past committee stage and campaigners have since sought to roll the issue of forfeiture and repossession into the ongoing wider efforts to reform the leasehold system.
In 2023, the then Conservative Housing Secretary Michael Gove said forfeiture was "wrong". During debates around the Leasehold and Freehold Reform Bill, the current Labour Housing Secretary (then a member of the opposition), Matthew Pennycook threw his weight behind calls for abolition, saying “forfeiture is a wholly disproportionate and horrifically draconian mechanism for ensuring compliance with a lease agreement, and it needs to be abolished.”
Pennycook has previously stated: ‘we will remove the disproportionate and draconian threat of forfeiture’ and his Ministerial Statement of November promised an ‘ambitious new Draft Leasehold and Commonhold Reform Bill in this parliamentary session’. It is therefore highly likely that the Government will introduce legislation to abolish forfeiture in the future. When exactly this will be, we will have to wait and see, though the stated intention is that this is likely to be published in the second half of this year.
Although the number of actual forfeitures carried out each year may still be relatively small, Labour clearly sees this as a point of injustice that needs to be addressed amongst the other proposed leasehold reforms.
Mark Chick, Partner and Head of the Landlord and Tenant team at Bishop & Sewell and a Director of ALEP
