A defaulting tenant

In Robert reichman & monica dunn v Sarah Beveridge & Matthew Gauntlett [2006] EWCA Civ 1659, the Court of Appeal decided whether a landlord, faced with a tenant that had abandoned its premises, was under a duty to mitigate its loss when seeking to recover arrears of rent.

Facts of the case

The defendants, who were in practice together as solicitors in partnership, were tenants of offices in Hampshire under a lease dated 30 August 2000, which was for a term of five years from 26 January 2000. They had ceased practising as solicitors in February 2003 and consequently had no further need for the offices. The defendants failed to pay the rent due on 25 March 2003 and thereafter. In January 2004, the claimants sued for arrears. The second defendant served a defence in which he said that the claimants were fully aware of the plight of the defendants which led to their ceasing to practise as solicitors, 'but failed to forfeit the lease in order to mitigate their own loss'.

A deputy district judge ordered a preliminary issue as to whether it is necessary as a matter of law for a landlord to mitigate its loss when seeking to recover arrears of rent. On 1 February 2005, DJ Kubiak held that a landlord was under no such duty. On 17 October 2005, an appeal was dismissed by HHJ Reid QC. The second defendant then appealed to the Court of Appeal.

Contractual rights

Lloyd LJ held that there is a very limited category of cases in which, notwithstanding the fact that the innocent party to a contract has not accepted repudiation by the other party and is able to continue to perform it obligations, the court nevertheless will not allow the innocent party to enforce its full contractual right. The characteristics of such cases are that an election to keep the contract alive would be 'wholly unreasonable' and that damages would be an adequate remedy or that the landlord would have no legitimate interest in making such an election: White and Carter (Councils) Ltd v McGregor [1962] AC 413 considered.

It was held that the right to the original rent comes to an end as soon as a landlord takes possession. A landlord therefore (if it forfeits a lease) cannot expect to be able to sue a tenant for damages in respect of the difference between the lower rent under a new letting and the rent to which it would have been entitled to under the original lease. Interestingly, Lloyd LJï'žµreferred to cases of the Supreme Court of Canada (in 1971) and of the High Court of Australia (in 1985) which decided that such damages can be recovered. However, it was held that there is no English case which decides that a landlord can recover damages of this kind.

In those circumstances, it was held that, either damages are not an adequate remedy for the landlord, or at least the landlord would be acting reasonably in taking the view that it should not terminate the lease because it may well not be able to recover such damages.

Lloyd LJ added: 'It would be difficult to describe the landlord's position as wholly unreasonable if it took the line that the tenant, whose default created the problem, should bear the burden of finding a solution.'

It was therefore held that a landlord is under no duty to mitigate its loss when seeking to recover arrears of rent and the second defendant's appeal was dismissed.

Exercising caution

Tenants should always exercise caution when entering a lease. If there is doubt as to how its business is going to progress, it is surely better to negotiate a shorter term lease or a lease with a break, but at a higher rent, than risk being liable for paying rent over a long lease term. Had the second respondent succeeded with its appeal, tenants may have become less inclined to exercise such caution.

Also, assuming a tenant has negotiated adequate alienation provisions in a lease, it is always open to it to find an assignee or sub-tenant. Where the market rent has dropped, a tenant may well find it difficult to assign or sublet, but that is a risk it should be aware of when it takes on a lease.

If there is enough demand for space, and the market rent is higher than the passing rent, it is more than likely that a landlord will terminate the lease and relet at a profit. If the market rent has fallen, a landlord can either sit back and claim the rent as it falls due (but having to leave the premises empty as a result) or can forfeit the lease (or even try to negotiate a surrender premium from the tenant) and instruct agents to remarket. Denying a landlord that choice in itself would surely be 'wholly unreasonable'.