Case review: can a landlord forfeit a long lease?

17 April, 2019

The case of (1) SHB Realisations Ltd and (2) GB Europe Management Service Ltd v (1) Cribbs Mall Nominee (1) Ltd and (2) Cribbs Mall Nominee (2) Ltd confirms that it is possible for a landlord to forfeit a long lease in certain circumstances.

BHS (now in liqudation) had a long lease (125 years expiring in 2123) of a unit at The Mall at Cribbs Causeway in Bristol for a peppercorn rent.  They had paid a premium of over £7m plus VAT for the fourth largest unit in the centre.  The second claimant has a charge over the property – the loan having been advanced shortly before BHS’s eventual collapse.  The lease contains a keep open covenant.

In December 2016 BHS went into liquidation and changed its name to SHB Realisations.  They started to market the lease in June 2016 and the store permanently closed in August 2016.  Since then they have been in breach of the keep open covenant.

There have been ongoing attempts to sell the leasehold interest which have not succeeded.

The defendants served a notice of forfeiture under s.146 of the Law of Property Act 1925, and the claimants sought relief and more time to complete an assignment.  Neither the particulars of claim nor skeleton argument identified the precise terms on which relief was sought.  The landlord counter-claimed for possession which had the effect of forfeiting the lease, and mesne profits.

The lease permits assignment, with the landlord’s consent, not to be unreasonably withheld, but the landlord also has pre-emption rights on a proposed assignment.  There is no tenant break clause but the landlord can exercise a break in 2023.  Sub-letting is forbidden.

There was little evidence that any potential retailer had done more than express an informal passing interest in the unit and had not taken steps to thoroughly investigate the lease, or made a formal subject to contract offer and there had not been any real negotiations.  The court heard extensive evidence from the parties’ respective letting experts about whether there was any market for the lease given its terms as well as valuation evidence concerning the value of the lease to the claimants and to the defendants’ reversion (which was £65m).

In deciding whether to grant relief the judge placed heavy weight on the following:

  • SHB was and is in deliberate but not wilful breach of the covenant;
  • It had an asset which was one of considerable value and it should not be deprived of the opportunity to reduce its debts;
  • GB is a secured creditor and it should not be deprived of its security;
  • There is still a market for the lease;
  • The lease has a value of over £1m;
  • The breach of covenant is incurable and will continue until an assignee is found;
  • The landlord will suffer ongoing damage;
  • If the landlords remain unable to recover possession they will be unable to devise and implement strategies for the mall incorporating the unit for their benefit and the benefit of all retailers in the mall;
  • The claimants’ hands were not clean and there was strong criticism of their attempt to use a phantom purchaser to trick the landlord regarding the pre-emption rights which the court held verged on fraudulent;
  • The court can impose conditions.

The judge also considered the potential windfall to the landlord (which would have been significant) but in the circumstances decided not to give it great weight.

Accordingly, relief from forfeiture was granted on condition that BHS completed an assignment of the lease, to any assignee, within three months in order to remedy the breach, or the lease would remain forfeit.

Accordingly, the grant of a long lease for a large premium should not cause landlords to dismiss forfeiture as an option out of hand.