A forfeiture clause allows a landlord to take back a property from its tenant if the tenant has failed to comply with the lease terms, or experiences financial difficulty (for example insolvency or bankruptcy).
From a tenant’s perspective, this seems a punitive remedy and the courts recognise this by providing a means to set aside forfeiture provided that the tenant promptly remedies the wrongdoing.
The inclusion of a forfeiture clause is not controversial or unusual for commercial leases where the landlord is entitled to receive an annual rent at a market rate and will expect to have the property returned in a good state of repair and condition. However, when a premium has been paid by a tenant for a long lease at a nominal rent, including a forfeiture clause can be problematic.
A forfeiture clause puts at risk a lender’s right to sell a property offered as security for a loan and therefore lenders can be reluctant to accept a lease which contains such provisions, particularly where this can be triggered by the tenant’s insolvency/bankruptcy. If the property cannot be mortgaged easily in turn, its value will be adversely affected. This is particularly so where the property is residential.
When buying a long lease which is found to contain a forfeiture clause, a buyer should try to have the clause removed or at the very least amended so that both the tenant and its lender must be given notice of any potential forfeiture and given an appropriate time to put right any breach.