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Forfeiture – how scared should lenders be and do they have to pay freeholders’ legal costs?

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Posted by Mary Rouse on 01 November 2012

Mary Rouse - Property Litigation Lawyer
Mary Rouse Partner

Some years ago, the law made it more difficult for freeholders to apply for forfeiture of leases. The Leasehold and Commonhold Reform Act 2002 placed a hurdle in the way of landlords seeking forfeiture due to breaches of the lease.

The Act prevents any attempt to forfeit a lease unless and until the landlord has obtained a determination of the breach. Any of the following constitute a determination:

  • A leasehold valuation tribunal (LVT), following an application by the landlord, has finally determined that there has been a breach of the lease.
  • The tenant has admitted the breach of the lease.
  • A court in any proceedings has finally determined that the breach has occurred.

The only exception to this is where there are arrears of ground rent only in which case no determination is required but the ground rent must have been properly demanded and must exceed £350 (or have been outstanding for more than three years).

As lenders you will know, when faced with a simple demand for payment (provided the demand is for more than just ground rent), and the leaseholder (borrower) has failed to pay, you can safely refuse to pay unless and until such time as the landlord obtains a determination. If in doubt, you should ask the landlord whether a determination has been made.

The effect of refusal is usually to force the landlord to issue a money claim through the County Court and obtain judgment for the outstanding sum – this counts as a determination. Armed with the judgment, the landlord will then approach the lender again, waving his judgment and demanding that the lender pays up to avoid forfeiture. Quite rightly, the lender will then usually pay up to protect its security, and the expense will either be added to the mortgage debt, or appear as arrears on the mortgage account. 

What if the landlord’s solicitors include a hefty bill for legal costs incurred?

Most lenders will assume that the landlord is entitled to recover these (usually the relevant provision in the lease, providing for payment of costs incurred in connection with forfeiture is quoted) and will pay both the judgment debt and the substantial bill for costs to avoid forfeiture. 

The question that this firm is being asked more and more by lender clients is whether they are obliged to pay the legal costs. The answer is no – at least, not yet – and this is why:

  • The landlord has a judgment – a determination – that there has been a breach, ie a failure to pay rent and services charges. To remedy that breach, and obtain relief from forfeiture, the leaseholder (borrower) has to pay the amount of the judgment. If he cannot or does not, then the lender can step in and pay the judgment.
  • Usually, there has been no determination in respect of costs (save for any fixed costs that may be awarded) and so whilst the lender must pay the amount of the judgment debt itself, there is no requirement at this stage to pay the legal costs to avoid forfeiture. The lease may provide for the leaseholder to pay any legal costs incurred but, unless the landlord has obtained a determination in respect of the costs also, then forfeiture cannot be pursued in respect of non-payment of the costs. 
  • It is possible that the solicitors acting for the landlord will have included within the money claim a claim for legal costs of a specific amount. judgment would then be entered for a sum comprising ground rent, service charges plus the specific legal costs. In those circumstances, you would need to pay everything to avoid forfeiture, but you will only be paying the amount the court has awarded judgment for.

In summary

if the judgment debt doesn’t include the legal costs (save for fixed costs) do not feel threatened by a landlord’s solicitors who present you with a demand for payment of a money judgment and a bill for legal costs. Pay the judgment and call their bluff regarding the legal costs. The reality is that, if they want their legal costs paid, and the leaseholder refuses to pay them, they will have to go back to court and obtain another judgment for them. Considering the level of some of the legal costs claimed, it is little wonder that these are not included in the original claim since they are often inflated and would not be deemed ‘reasonable’ by the court.

Solicitors acting for landlords rely on the fact that lenders threatened with forfeiture will pay what is demanded to protect their security. We would advocate circumspection; establish what exactly the landlord has obtained a determination for and pay only what is necessary. It may be that the landlord will go back to court for a determination regarding the legal costs. If they do, and they are successful, that would be the time to pay the legal costs, but there is no guarantee that they will succeed unless they greatly reduce the amount of costs they are claiming!

Lenders are rightly nervous of threats of forfeiture, but be aware that even if forfeiture proceedings are issued and an order is made, forfeiting the lease, it is still not too late for a lender to apply for relief. Whilst lenders should have clear procedures in place for dealing with demands for payment from landlords and, indeed, such threats should be treated seriously and dealt with as a matter of urgency, lenders should not allow themselves to be bullied into paying sums for which a determination has not been obtained.

About the author

Mary Rouse

Partner

Mary is an experienced property litigation lawyer.

Mary Rouse

Mary is an experienced property litigation lawyer.

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