forfeiture clause property management guideThe dreaded ‘F’ word when it comes to property leases can have a negative reaction from those lending money against the property interest, and cause all kinds of issues and confusion, with talk about varying leases and separate documentation and letters. For those wanting to purchase a property interest this can be a huge issue and deal-breaker, something you need to firstly fully understand before you then try to resolve.
 
It's about a clause or series of clauses in a long leasehold interest that can allow the landlord to forfeit the lease through the process of forfeiture. You tend to see them in both long residential interests such as flats where you can’t purchase the actual freehold, or long commercial leases such as small office units. Without going into too much technical detail, these clauses allow the landlord to terminate the lease if the tenant does not behave or pay up, and although there has been legislation and case law trying to water down this dramatic effect, they do still exist in most long leases.
 
Now for a short term lease it might not be such an issue for a tenant, in fact they might even welcome the landlord to help them end the lease as the power of forfeiture is to literally legally determine the lease and rights and obligations under it.

But with longer leases, such leases are simply a way of documenting an ownership of a property interest long term, so a residential tenant may have paid £100,000 to purchase a lease, and if this suddenly ends, you’ve lost your £100,000 just like that.
 
The good news is that they are hardly ever used or successful, because even if the forfeiture was actioned by the landlord, the tenant has rights of relief and to have the lease re-instated if they do comply, particularly so with residential property.

So in reality they’re not very useful, but on paper they do still exist and at the very least cause delays, costs, and confusion, and in fact from a property management perspective they are a very useful last-resort tool that can be used to pursue tenants to pay up or behave when they need to, even though you may not need to follow through with it.
 
But for banks and lenders giving money for people to purchase a property interest they are a big headache, and on paper means that they could lose all their property assets that they have just spent money on.

So in the above example, if a bank lends £100,000 for someone to purchase a flat through a long lease, then if the landlord did exercise this and the tenant defaults on payments they have nothing left of any value to re-pay the mortgage. Not every lender will react this way, and realise that this is the norm in long-leases and that a landlord would rarely get away with it, but for some lenders it can be, particularly in difficult market conditions or where the applicant has questionable financial standing.
 
In these cases the lenders may have three reactions. Firstly, simply refuse to lend. Secondly, offer to lend if this clause is agreed by the landlord to be removed from the lease. And thirdly, the landlord needs to agree in a side letter to at least formally notify the lender themselves and provide, say, a month’s notice of any intention to forfeit the lease to give the lender time to react and offer payment and add to their debt.
 
Taking these in reverse order, the last option of a letter is often agreed as a practical solution, but you need to make sure the tenant pays legal fees for this to be correctly agreed and completed. It does not only help the tenant to get the lending and purchase agreed, but also helps the landlord to now have a specific lender they can notify about future problems.
 
The second option is not the norm, probably due to the tenant not having a great track record, or the lender having unreasonable lending criteria. Even if the landlord did agree and have their huge legal costs covered for things like a Deed of Variation, it means a watered-down lease interest and potential value just for one tenant’s own circumstances. A landlord shouldn’t feel backed into a corner to agree this as it’s by choice that a landlord would do, unless with residential property where it is decided as reasonable through, say, a Tribunal.
 
Which leaves the first option of refusal, which as above raises question on the validity of the purchaser tenant and lender. Parties will need to think outside the box on this, look at other lending options or different ways to re-negotiate the whole purchase and documentation, maybe with things like an additional deposit by the tenant for any forfeiture provision they do agree to have removed.
 
In short, don’t rush into things. Although forfeiture is hardly ever used, and you can understand lenders’ issues with it, you need to get to the bottom of what the root issue is, take correct legal and property advice with costs clearly covered, and think of the long term consequences.

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