Section 81 (Restrictions on Forfeiture)

Summary

1. This section states that a Landlord may not issue Forfeiture proceedings for failure to pay a Service Charge unless:

i. The leaseholder has ‘admitted’ that the Service Charge is due.

ii. A Court or Tribunal has made a ‘Determination’.

What is Forfeiture?

1. Section 146 of the Law of Property Act 1925 gives a Landlord a ‘right of re-entry’ to their property in the event that the leaseholder breaches the term of their lease. This means that the leaseholder ‘forfeits’ (loses) their right to use the property and the process is known as ‘Forfeiture’.

2. This is the ultimate sanction a Landlord can impose against a Leaseholder for not paying their Service Charge.

3. When Forfeiture takes place the Landlord pays no compensation to the Leaseholder, even if the Lease which is forfeited is worth hundreds of thousands of pounds. The Leaseholder loses any ownership rights to the property and must vacate, whilst still burdened with any outstanding mortgage on the property.

What is a Determination?

1. A determination means a decision by a Court or Tribunal. The decision must confirm that payment of a Service Charge is properly due under the terms of a Lease before a Landlord can issue proceedings for Forfeiture.

2. A very important point for Leaseholders to note is that a ‘Judgement in Default’ counts as a Determination.

3. A Judgement in Default is made by a Court when the party against whom a claim is made simply fails to respond. This happens very frequently when Landlords make a Money Claim against a Leaseholder for non-payment of Service Charges because, sadly, many Leaseholders simply ignore the County Court Claims form when it comes.

4. Leaseholders should never ignore a County Court Claims form as once a judgement is made in default after a 14 day period a landlord is entitled to issue a notice for forfeiture of the lease.

What does this mean for Service Charge payers?

1. Section 81 is one of a number of restrictions on the right of a Landlord to apply for Forfeiture of a property.

2. Others include rules on the issuing of a notice before they apply to a Court for Forfeiture and a minimum amount of Service Charge which must be outstanding before Forfeiture will be granted by a Court.

3. An unexpected consequence of Section 81 of the Housing Act 1996 is that it has been interpreted by the Courts as allowing greater ability for Landlords to recharge Leaseholders their legal costs.

4. Many leases allow Landlords to charge Leaseholders for any costs they incur as a consequence of attempting to exercise their right of forfeiture, but do not allow the Landlord to recharge Leaseholders the costs of other types of legal proceedings.

5. What the Courts have decided in cases such as Freeholders of 69 Marina v Oram [2011] EWCA Civ 1258 is that because a Determination is required before a Landlord can exercise their right of Forfeiture this means that any legal proceedings involving a dispute over a breach of Lease (including a dispute over a Service Charge) can be considered part of the Forfeiture process.

6. For this reason the Courts have interpreted clauses in a Lease giving a Landlord the right to recharge the cost of the Forfeiture process as giving the Landlord the right to recharge the cost of any legal proceedings related to resolving a Service Charge dispute.

Click on the link to read more about The Housing Act 1996