In Chug v Dhaliwal [2023] EWHC 804 (Ch) the High Court considered the circumstances in which a tenant is prevented from challenging the lawfulness of forfeiture of a lease by peaceable re-entry.
The decision also provides a helpful reminder of the principles relating to waiver of the right to forfeit and the validity of s.146 notices.
Background
Mr and Mrs Dhaliwal were the freeholders of 358-360 Bath Road, Hounslow ("the Property"). In 2005 they granted a 20 year lease of the Property to Mr Chug. Mr Chug operated a homeware shop out of the Property ("the Lease"). The Lease incorporated a covenant against alienation whereby Mr Chug covenanted not to part with possession of the Property or suffer any other person to occupy the whole or part of it.
In late 2016, Mr Chug sold his business to a Mr Dhawan for £150k. Mr Dhawan entered occupation of the Property. There was no assignment of the Lease to Mr Dhawan and the landlords were never informed that Mr Dhawan had taken up occupation of the Property. Instead, Mr Dhawan paid to Mr Chug a sum each month that corresponded to the rent payable under the Lease which Mr Chug paid on to Mr Dhaliwal.
In January 2019, Mr Dhaliwal became aware that somebody other than Mr Chug was in occupation of the Property. A month earlier, in December 2018, a payment of rent had been missed. Also, another issue had arisen relating to an alleged unlawful alteration of the Property.
Notwithstanding his knowledge of the above matters, Mr Dhaliwal continued to accept the rent for the January to April 2019 period.
On 1 May 2019, Mr Dhaliwal served on Mr Chug a notice under s.146 of the Law of Property Act 1925. This notice referred to the alleged breaches of the alterations clause (cl 3(10)), the alienation clause (cl. 3(13)(a)), and to the December shortfall in rent.
Mr Dhaliwal accepted further payments of rent on 25 May 2019 and 24 June 2019.
On 5 July 2019, Mr Dhaliwal instructed bailiffs and re-entered the Property. Mr Dhawan was excluded.
On 9 July 2019 Mr Chug wrote to Mr Dhaliwal stating that he understood that it was his responsibility to put the Property " ... into a state as it was at the time of the [L]ease ". As regards the occupation by another party, the letter said the position would be regularised by the making of an application for consent.
Discussions followed in the period between 9 to 20 July 2019. During the course of these discussions, Mr Chug informed Mr Dhaliwal that he accepted the forfeiture and that he would waive any further claims in respect of the Property on condition of the Dhaliwals agreeing not to pursue him for any dilapidations that might otherwise have arisen.
Separately, Mr Dhaliwal reached an agreement with Mr Dhawan that he (or his company, Essential Homewares Limited) would be allowed back into the Property to continue trading pending negotiations about a new lease.
While the negotiations for a new lease were ongoing, Mr Dhawan paid rent during August and September 2019. These payments were made pursuant to the agreement that had been reached between Mr Dhaliwal and Mr Dhawan.
Ultimately, the negotiations between Mr Dhaliwal and Mr Dhawan failed and second re-entry to the Premises was effected on 12 December 2019.
Thereafter, the Dhaliwals granted a new lease to a third party.
Mr Chug and Mr Dhawan's company (Essential Homewares Limited) issued proceedings where they sought various relief but principally a declaration that the re-entry effected on 5 July 2019 was unlawful or alternatively relief from forfeiture.
These proceedings were dismissed by HHJ Saggerson who found, inter alia, that Mr Chug agreed to accept forfeiture of the Lease and relinquish any further interest in the Property in return for Mr Dhaliwal agreeing not to pursue him for dilapidations.
The appeal
The Claimants appealed. The grounds of the appeal were summarised by Adam Johnson J at para. 25 of his decision:
"i) They argue that there were no effective breaches of the Lease by the time of the re-entry on 5 July. As to what the Judge found on the topic of breach, he held (1) that in fact there had been no breach of the alteration covenant (cl. 3(10)), because the relevant alterations were not of such a type as to have required consent; (2) although there had been the admitted shortfall in rent in December 2019, any resultant right to forfeit the Lease had been waived by Mr Dhaliwal continuing to accept rent in the period January to April 2019, and then again in June 2019; but (3) Mr Chug was plainly in breach of the alienation covenant (cl. 3(13)(a)) given his informal arrangement with Mr Dhawan, and the right to forfeit the Lease in light of that breach had not been waived, and that justified the re-entry. The Appellants now challenge this final point (i.e., conclusion (3)). They argue that the acceptance of rent by Mr Dhaliwal in periods after January 2019 must also have resulted in a waiver of any right to forfeit arising from breach of the alienation covenant, just as it resulted in a waiver of any right to forfeit arising from the failure to pay rent.
ii) The Appellant's second Ground is that the s. 146 Notice served by Mr Dhaliwal on 1 May 2019 was deficient, specifically in that it did not specify in terms – as it should have done – that Mr Chug was required to remedy the breaches complained of. Since, in light of the Judge's other findings, the only breach of potential relevance is breach of the alienation covenant, the substance of the complaint is really that the Notice failed to specify that Mr Chug was required to remedy the breach which arose because of his informal arrangement with Mr Dhawan.
iii) The final Ground is that, in exercising his discretion whether to grant relief from forfeiture, the Judge failed to take into account all relevant factors and/or failed to do so on a principled basis, and reached a decision which was perverse. The meat of this complaint is that the Judge failed entirely to take into account the value that would be lost to Mr Chug by immediate forfeiture of the Lease which, at the time, still had about six years to run. Depriving Mr Chug of that value was disproportionate given that the breach had not in any meaningful way caused any loss to the Dhaliwals (who had continued to receive rent in spite of it). Refusing relief was really in the nature of punishing Mr Chug for his wrongdoing, which was unfair unless balanced together with other factors; and moreover involved doing so in a manner which allowed the Dhaliwals to make a large windfall – because having forfeited the Lease they were able to enter into a new lease at a higher rent (£80,000 p.a.), and with payment of a premium (£60,000).
The appeal was dismissed. The agreement that was reached between Mr Chug and Mr Dhaliwal in July 2019 whereby Mr Chug agreed to accept forfeiture of the Lease and relinquish any further interest in the Property in return for Mr Dhaliwal agreeing not to pursue him for dilapidations was key to the Court's reasoning. The Court found that the effect of this agreement was that it was now not open to Mr Chug to challenge the lawfulness of the forfeiture or for him to seek relief from forfeiture. Accordingly, all three grounds of appeal were dismissed.
The Court held (at paras. 41 – 42):
41. It seems to me that these points on their own provide a complete answer to the Grounds of Appeal. They must do:
i) As to Ground 1, any possible complaint about the lawfulness of the re-entry on 5 July was effectively settled by Mr Chug agreeing to accept the forfeiture which had taken place – whether rightly or wrongly – and thus wash his hands of the Property.
ii) The same logic applies as regards Ground 2, because the same agreement had the effect of overriding any possible complaint about formal deficiencies in the s. 146 Notice. Whether deficient or not, Mr Chug was content (in the Judge's words from para. [59]) to " ... set aside any further claims in respect of the Property ."
iii) The same is true of Ground 3, which concerns exercise of the discretion to provide relief against forfeiture: since Mr Chug agreed to accept the forfeiture, he was not thereafter in any position to seek relief from it.
42. For these reasons alone, all of which flow from basic factual findings made by the Judge which have not been challenged, I would dismiss the Appeal.
Whilst unnecessary to dispose of the appeal, the Court nonetheless went on to consider each individual ground of appeal:
i. First ground: The Court found that the breach of the alienation clause was a continuing breach. This could be contrasted with the failure to pay the rent which was a one-off breach. Therefore, the fact that Mr Dhaliwal continued to accept rent did not have the effect of waiving the right of forfeiture because the breach of the alienation clause was a continuing breach which arose afresh every day and accordingly survived any act of waiver.
ii. Second ground: The Court found that, applying the reasonable recipient test laid down by the House of Lords in Mannai Investment Co Ltd v Eagle Star Assurance Co Ltd [1997] AC 747, a reasonable person in the position of Mr Chug would have understood the s.146 notice to be asking him to regularise the irregular occupation of the Property.
iii. Third ground: The Judge found that Mr Chug had lost the right to seek relief from forfeiture by reason of the agreement that had been reached in July 2019.
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