Mortgagees of Leasehold Property Left out in the Cold

Originally published in June 2003

A recent decision of the Court of Appeal1 and changes to the rules of court procedure have left lenders which have security over leasehold property at risk of their security being extinguished without notice if a landlord forfeits the lease.

In Smith v Spaul the claimant landlord sought to forfeit a lease on the grounds of breaches of repairing covenants. The landlord served a section 146 notice on the mortgagee which had taken possession of the premises and which then served a counternotice claiming the benefit of the Leasehold Property (Repairs) Act 1938 requiring the landlord to obtain the court's permission before forfeiting the lease. However, the landlord commenced forfeiture proceedings without seeking the court's permission and the Court of Appeal held that a mortgagee is not entitled to be served with a section 146 notice and that a landlord would not be bound by a mortgagee's notice under the 1938 Act.

The Effect of the Court of Appeal's Decision:

Mortgagees of commercial leases have no automatic entitlement to be notified of proceedings commenced by a landlord to forfeit a lease. There is no general duty on a landlord to notify a mortgagee that it intends to take such action.

Even a mortgagee which has taken possession of premises may know nothing of the forfeiture of a lease until it is too late to do anything about it.

To restore a lease and obtain relief from forfeiture, a mortgagee would probably have to remedy the breaches and pay the landlord's costs.

The Reason for the Decision

The Court of Appeal has taken the view that because a landlord and tenant are contractually bound by virtue of the lease, their fundamental relationship is unaffected by a mortgage, even if a mortgagee has already taken possession of the premises.

The Change to the Court Rules

It is no longer the case that a landlord of commercial premises must name in possession proceedings all parties which may be entitled to relief from forfeiture, although it does remain the case in residential possession proceedings.

If a landlord decides to forfeit a commercial lease for non-payment of rent by taking peaceful possession of the premises, the forfeiture can be without notice even to the tenant and does not require a possession order to be obtained.

In cases of non-rent breaches a landlord must serve a notice pursuant to section 146 of the Law of Property Act 1925. There is no general duty on a landlord to serve it on a...