Hogan Lovells recently represented the landlords in SHB Realisations Limited and GB Europe Management Services Limited v Cribbs Mall Nominee (1) Limited and Cribbs Mall Nominee (2) Limited, a case confirming that it is possible in certain circumstances to forfeit a long lease granted for a substantial premium.
Leases invariably include a right for landlords to bring a lease to an end before lease expiry if a tenant is in breach (known as a right to forfeit or right of re-entry).
A tenant can apply for relief from forfeiture and, when exercising its discretion as to whether to grant relief, one of the central factors a court will consider is the value of the tenant’s lease.
As a result, there is a widely held belief that a tenant will invariably get relief against forfeiture of a long lease because the courts do not like to see tenants losing a valuable asset and, by corollary, landlords obtaining a windfall.
Background to the case
Shop premises previously occupied by BHS (now in liquidation) were let in 1998 for a 125 year term at a premium of £7 million and a peppercorn rent.
The landlords had a right to forfeit the lease for any breach by BHS of its covenants, including a “keep open” covenant to maintain trade at the store.
BHS ceased to trade from the premises in 2016. As a result, the landlords took steps to forfeit the lease for BHS’s breach of the keep open covenant. BHS issued proceedings for relief from forfeiture. In response, the landlords counterclaimed for possession which had the effect of forfeiting the lease.
According to BHS, the lease was valuable because they could sell it to another retailer for a significant premium, and thereby remedy the breach. However, by the date of trial in early 2019, BHS had failed for over two years to find a buyer. The landlords argued that there was, therefore, no market for the lease and so no value that BHS would lose if relief was refused.
The court’s decision
The judge at trial considered that if the lease had had no value then any windfall to the landlords was irrelevant when considering whether to grant relief.
However, whilst “there can be no doubt that the value of the lease has depreciated considerably given the new retail world and its terms“, the judge concluded that there was some interest from a third party in taking an assignment of the lease. He said that there was “an extremely weak market and there is no evidence… to suggest that the market is likely to get any stronger“.
Having decided that the lease had some value, the judge acknowledged that the windfall to the landlords was relevant but did not give it great weight. In reaching this conclusion, he took into account the conduct of the parties and the fact that the appreciation in value for the landlords was nothing like the amounts suggested by BHS.
The judge concluded that relief should be granted, but on condition that BHS completed an assignment of the lease within three months, thereby remedying the breach. If it failed to do so then the lease would remain forfeit for all purposes.
This case shows that landlords should not dismiss forfeiture as an option simply because the tenant has a long lease granted for a significant premium.