Breach of Covenant: Whether an acceptance of rent following a tenant’s breach of covenant will waive the landlord’s right to forfeit (Faiz v Burnley Borough Council – 2021)

Where a tenant breaches the terms of its lease, and the landlord is aware of the breach, does the landlord waive its right to forfeit the lease if it continues to accept rent?

The background

In Faiz v Burnley Borough Council [2021], the Council granted a lease of a café which was vested in the tenant appellants. The lease was contracted out of the Landlord and Tenant Act 1954 security of tenure provisions, and required the tenant to pay rent and insurance rent quarterly on 1^st January, 1^st April, 1^st July and 1^st October each year. The lease prohibited sub-letting.

The tenants granted a sub-lease to a company ‘SASSF Limited’, in breach of their lease covenants. A demand for insurance rent was issued by the Council and unpaid by the tenants, following which the tenants sent the Council a copy of the sub-lease. The Council subsequently served a notice of intention to forfeit under s.146 of the Law of Property Act 1925, but then a week later issued a further demand for insurance rent, including the previous unpaid amount. The tenants paid this demand, but the Council then re-entered the premises purporting to forfeit the lease.

At trial, the Court found that the Council had not waived its right to forfeit the lease by accepting rents after it had become aware of the breach. The tenants appealed.

The decision

The Court of Appeal dismissed the appeal, finding that the Council had not waived its right to forfeiture by accepting payment of the insurance rent sum. The demand had included a period prior to the date that the sub-lease had been completed.

The Court found that it was possible for a landlord to accept rent payments after it becomes aware of a breach having occurred. Referencing an earlier judgment in Osibanjo v Seahive Investments Ltd [2008], the Court agreed that ‘it should not matter whether the rent which is accepted has accrued due before or after the date of knowledge [of the breach]’. The point at which the breach occurred is the date to consider, rather than the date the landlord becomes aware of it.

Further, the Court concluded that the landlord must have known not only that the sub-lease had been granted, but that the rent demanded related to a period following the breach. The Council’s insurance rent demand included the period prior to the breach and so the Council had not waived its right to forfeit. The issue of the second insurance rent demand by the Council was not a fresh demand accruing after the breach; it covered a specified period, supporting the Council’s view that the lease had been terminated and made no demand for any continuing sums.

Advice and action for landlords

Landlords will be comforted by the Court of Appeal’s judgment here, requiring tenants to discharge a burden of proof as to a landlord’s waiver. Landlords may still make a demand for rents covering periods within which they are aware of a breach existing, provided that the demand covers a defined period, does not allow for any continuing tenancy and where the demand covers a period prior to the landlord becoming aware of the breach.

The crucial date to consider is the date when the breach occurs, rather than the date the landlord becomes aware of it.