Termination of Leases — SQE1 FLK2 Property Law and Practice

Your client did everything right. It had a break clause exercisable on 30 June 2027. It served a valid notice six months ahead, on 31 December 2026. It moved out. It paid every penny of rent. And five days before the break date, the landlord's surveyor walked the building and found a cracked window frame. £150 to put right. The break failed. The lease runs on.

Why? The break was conditional on compliance with all the tenant covenants, and a cracked window frame breaches the repairing covenant. You either meet a break condition exactly, or the lease continues. This is Termination of Leases, the thirteenth topic in Property Law and Practice. Keep your client in mind. We are coming back for it.

Here is the route. Four ways a lease ends: effluxion of time, surrender, merger and forfeiture. We take them in that order, and forfeiture gets the most room because it has the most procedure. Then the remedies a landlord can use instead of forfeiting. And last, break clauses, which is where your client came unstuck.

Four ways out, and the way a lease ends changes what happens next. Effluxion of time, which is natural expiry. Surrender, which is agreement. Merger, which is common ownership. And forfeiture, which is the landlord terminating for breach. They differ in what they do to accrued liabilities, to deposits, and to anyone holding an interest carved out of the lease.

Effluxion first, because it is the simplest. A fixed term determines automatically when it expires. Nobody serves a notice. Nobody executes a release. The tenant vacates, returns the keys, leaves the premises in good condition subject to fair wear and tear, and pays rent to the expiry date. Liabilities already accrued survive. The covenants stop binding.

Except that quite often the term expiring ends nothing at all. Take a business tenancy protected by the Landlord and Tenant Act 1954. Section 24 continues it on the same terms until it is ended by one of the methods the Act prescribes. No new tenancy arises. The term date comes and goes, and the tenancy simply carries on.

Now take a contracted-out lease, where the Act does not apply, and the tenant stays on. What has it got? If nothing is agreed, a tenancy at will. But suppose it pays rent referable to a period and the landlord accepts it. An implied periodic tenancy arises, and the court asks what the parties must be taken to have intended. That is Javad v Aqil.

Here is the detail that gets tested. The period follows the period by reference to which rent is paid and accepted. Not the term of the old lease. So a company holding over under an expired five-year lease, paying £6,000 at the start of each month, which the agents bank without comment, gets a monthly tenancy. Monthly rent, monthly tenancy.

Surrender next. It is the voluntary ending of the lease by agreement, and both parties must agree. A tenant cannot simply hand the lease back. A surrender conveys the leasehold estate to the landlord, so section 52 of the Law of Property Act 1925 makes it void unless made by deed. The deed must satisfy section 1 of the Law of Property Miscellaneous Provisions Act 1989.

There is one exception, and it matters. Surrender by operation of law is excepted from the deed requirement. Where both parties act in a way that is unequivocally inconsistent with the lease continuing, the lease goes, whatever anyone signed.

So try this. A company with six years unexpired clears its shop and delivers the keys to the landlord's property manager. The manager takes them, says the landlord will look for a replacement, and instructs letting agents that week. A new tenant takes a lease of the same unit from June. In September the company writes claiming it is still the tenant because nothing was signed. Is it?

No. Giving up possession and delivering the keys is the tenant's side of it. Taking the keys, instructing agents and granting a new lease of the same unit is the landlord's. The lease ended in April. No rent falls due afterwards, though liabilities accrued before then survive.

Merger third, and candidates get this wrong by assuming it is automatic. Merger happens where the leasehold estate and the immediate reversion come into the same hands in the same right. The tenant buys the freehold, or the landlord buys the lease. There is then no reversion for the lease to be held of, and nobody can enforce covenants against themselves.

But common ownership is necessary, not sufficient. Under section 185 of the Law of Property Act 1925 the estates merge at law only where equity would treat them as merged. Intention governs. Equity presumes against merger where merger would be against the interest of the person taking both estates.

Which produces this. A company holds a 15-year lease of a three-storey building and has sublet the second floor. It then buys the freehold, and nothing is said about either lease. Does the headlease merge? No. Equity will not allow a merger that destroys a derivative interest, and the sublease is exactly that. The headlease survives as the reversion on it. Check for subtenants and lenders before you complete.

Forfeiture. The landlord ending the lease because the tenant has broken it, and the part with all the procedure. First point: there is no right to forfeit unless the lease gives one. Find the right of re-entry and read it. No forfeiture clause, no forfeiture.

Second point, and the whole topic turns on it. For non-payment of rent, no section 146 notice is required. Section 146 of the Law of Property Act 1925 simply does not apply to a right of re-entry for rent. For a breach of any other covenant, a section 146 notice is a precondition of forfeiture.

Take rent first. At common law the landlord must make a formal demand before forfeiting. Most leases displace that, by making the right of re-entry exercisable whether the rent has been formally demanded or not. It is also displaced where at least six months' rent is in arrears. So on a well-drafted lease, once rent is unpaid for the stated period, the right has arisen.

Now the notice, for every other breach. It must specify the breach. It must require the breach to be remedied, if the breach is capable of remedy. It must require compensation in money, if any is claimed. And it must allow a reasonable time for compliance, which depends on the breach; there is no fixed minimum.

A letter from the landlord asking for the repairs to be done is not a section 146 notice, however firmly it is written.

Two refinements. Some breaches cannot be remedied at all. An unlawful assignment or subletting is committed once and for all when it happens. The notice must specify it, but need not require remedy, and only a short time need be allowed.

And for a repairing covenant there is an extra hurdle. In a lease granted for at least seven years with three or more years unexpired, the tenant may serve a counter-notice under the Leasehold Property Repairs Act 1938. The landlord then needs the leave of the court to go on. Check the length of the term before you advise.

Then waiver, which is where landlords lose cases they should win. A landlord waives the right to forfeit if, knowing of the breach, it does something that can only be done on the footing that the lease continues. Demanding or accepting rent falling due after it learned of the breach is the classic instance. It operates whether or not the landlord intended it, and the acts of managing agents count as the landlord's.

How much is lost depends on the kind of breach, and this is the distinction to hold. A once-and-for-all breach, such as an unlawful assignment, can never be forfeited for again once waived. Accept one quarter's rent knowing of the assignment and the right is gone for good.

A continuing breach is different. A prohibited use, or disrepair, gives a fresh right to forfeit each day it persists. So waiver bites only up to the date of the act relied on. Accept the September rent knowing an employee is living in the offices, and you have waived September. You have not waived October and November.

Then relief, because forfeiting is not the end of the story. For a non-rent breach the tenant may apply under section 146, and so may a subtenant or a mortgagee. That last point matters to a landlord: relief can leave it with an occupier it never chose.

For rent, relief is very commonly granted if the tenant pays promptly, because a right of re-entry for rent is security for the rent rather than a windfall. Where the landlord re-entered peaceably, the tenant may apply to the county court within six months, under section 139 of the County Courts Act 1984. For High Court proceedings, section 38 of the Senior Courts Act 1981.

So how does a landlord actually forfeit? Two routes. Peaceable re-entry, meaning changing the locks. Or court proceedings for possession. Peaceable re-entry is quick, cheap, and entirely at the landlord's risk. If the right has not arisen, or has been waived, changing the locks is a trespass and a wrongful eviction.

And for premises let as a dwelling it is not merely risky. While anyone is lawfully residing there it is unlawful, and section 2 of the Protection from Eviction Act 1977 requires court action. Proceedings are the safer course almost everywhere. One more consequence: forfeiture destroys any renewal rights under the Landlord and Tenant Act 1954, because there is no tenancy left to renew.

Forfeiture is the nuclear option, so know what else is on the shelf. An action in debt for the arrears. Drawing on a rent deposit, if there is a deed. Pursuing a guarantor, or a former tenant under an authorised guarantee agreement. Remember that a fixed charge such as rent must be notified within six months of falling due, or it is lost.

Then commercial rent arrears recovery, under the Tribunals, Courts and Enforcement Act 2007. A certificated enforcement agent takes control of the tenant's goods and sells them, with no court order at any stage. It needs a written lease, no part occupied as a dwelling, and at least seven days' net unpaid rent. The agent must give at least 14 clear days' notice of enforcement before taking control.

Two limits on it. Only rent in the strict sense: service charge, insurance and repair costs fall outside, even where the lease reserves them as rent. And exercising it treats the lease as continuing, so it waives any subsisting right to forfeit. Choose your remedy before you act, not after.

One more, for disrepair. Many leases let the landlord enter, do the works the tenant failed to do after notice, and recover the cost. Jervis v Harris establishes that the sum recovered is a debt under the express covenant to pay it, not damages for breach of the repairing covenant. That is the whole value of the clause: a claim in debt escapes the statutory cap on damages for disrepair, and escapes the 1938 Act.

Last, break clauses, and back to your client. Break conditions are construed strictly and must be satisfied exactly. Two traps recur. A condition to pay all sums due catches default interest that accrued automatically under the lease and was never demanded. And a condition to give vacant possession means free of people, chattels and legal interests, so security guards left on site while contractors finish will defeat it.

A warning about the money, too. Rent paid in advance for the quarter in which the break falls is not apportionable, and is not repayable without an express refund clause. In the Marks and Spencer case the Supreme Court refused to imply a term requiring repayment. The Apportionment Act 1870 does not help, because it does not apply to rent payable in advance.

One piece of good news for tenants. A notice is read as a reasonable recipient with knowledge of the lease would read it. In Mannai Investment Co Ltd v Eagle Star, that principle saved a break notice giving the wrong date. Where there is only one possible break date and the notice unambiguously exercises the break, an obvious slip misleads nobody, and the notice stands.

A word on how SQE1 tests this. You will not be asked to recall a case name or a section number. You get a scenario, five answers, and one instruction: pick the best. So learn what each rule does, and let the names be memory pegs.

If you keep only three things, keep these. Section 146 of the Law of Property Act 1925, and the exception to it: no notice for unpaid rent, a notice for every other breach. Waiver, and the difference between a once-and-for-all breach and a continuing one. And the strictness of break conditions, which is why your client is still paying rent on offices it has left.

Five traps. One: holding over can create a periodic tenancy without anybody deciding to. If a tenant stays on and the landlord banks the rent, an interest arises, and it can be awkward to get rid of. Two: merger is not automatic. Common ownership is necessary but not sufficient, so check for subtenants and lenders before you complete.

Three: a letter is not a section 146 notice. However clearly it sets out the breach and however firmly it demands action, if it is not a section 146 notice the forfeiture is bad. Four: stop demanding rent the moment you start thinking about forfeiture. Waiver operates whether or not you meant it, and what your managing agents do counts as what you did.

Five: forfeiture is a last resort, not a first response. Take a tenant who has paid on time for years and is in temporary difficulty over a repair. A court is unlikely to refuse relief. The proportionate advice is a remedy that leaves the lease standing: damages, or exceptionally specific performance.

Quick check. A company holds a 20-year lease of industrial premises granted in 2010, with a full repairing covenant and a right of re-entry for breach of any covenant. On an inspection in March the landlord finds the roof leaking badly and the walls damaged. The works will cost about £50,000. The landlord writes requiring the repairs. Two months later nothing has been started, and it now wants the premises back.

Can the landlord re-enter and forfeit at this point? Three candidate answers. One: yes, the breach is clear and the right of re-entry has arisen. Two: no, the landlord must first obtain a court order permitting re-entry. Three: no, a section 146 notice must first be served, requiring the breach to be remedied in reasonable time. Pause here if you want a moment.

The answer is three. This is a breach of a covenant other than the covenant to pay rent, so section 146 makes service of a notice a precondition of forfeiture. Disrepair of this kind is remediable, so the company must be given a real opportunity to put it right. The letter was not such a notice.

And a second hurdle the facts are built to catch. The lease was granted for 20 years, with more than three years unexpired. So the notice must also tell the company of its right to serve a counter-notice under the Leasehold Property Repairs Act 1938. Then the landlord needs the court's leave to go further.

Why the others fail. One ignores the statutory precondition: the right of re-entry has arisen, but section 146 stands in front of it. Two invents a requirement. For commercial premises with nobody residing there, peaceable re-entry needs no court order. Risky, usually unwise, but not unlawful.

Five things to take away. One: a fixed term ends automatically, unless the Landlord and Tenant Act 1954 continues it. Two: surrender needs a deed, unless both parties act in a way unequivocally inconsistent with the lease continuing. Three: merger needs common ownership and intention, and equity will not let it destroy a sublease.

Four: no section 146 notice for unpaid rent, a section 146 notice for everything else, and a letter is not a notice. Five: waiver kills a once-and-for-all breach for good, but bites only up to the date of the act relied on where the breach is a continuing one.

And your client, with its cracked window frame? The break condition was compliance with all the tenant covenants, and it was in breach on the break date by £150. So the notice failed and the term runs on. The lesson is not about windows. A tenant's adviser walks the building and reads the rent account before the break date, not after. Next time, Security of Tenure.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.