How extensive is the court’s right to grant relief from forfeiture?

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

All landlords will be aware of the remedy of forfeiture – the contractual right to re-enter premises and end the lease when your tenant is in breach of its obligations (and most commonly because it isn’t paying rent). It can be an extremely effective “short sharp shock” to encourage your tenant to behave, particularly because of the huge disruption caused to a trading business when the tenant’s employees turn up at work to find the locks have changed.

But what about relationships other than that between a landlord and tenant? What about, for example, a licence which relates to land, or an easement over land? Normally, the aggrieved party would be able to exercise rights (if contained in the contract) to bring the agreement to an end – but the party in breach would not have a right to have the agreement reinstated.

In the recent case of General Motors UK Limited v The Manchester Ship Canal Company Ltd, we have a positive answer for a licensee who successfully claimed relief from forfeiture.

GM entered into a licence but failed to pay the licence fee

Manchester Ship Canal Company (MSCC) is the legal entity that owns and operates the Manchester ship canal, a 36-mile-long inland waterway linking Manchester to the Irish Sea. General Motors (GM) owns a Vauxhall car manufacturing plant located on land in Ellesmere Port, adjacent to the canal.

In 1962, MSCC entered into a contract with GM permitting the discharge of surface water from GM’s land into the canal over part of MSCC’s land, in perpetuity, for an annual fee of £50 (the Licence). Under the terms of the Licence, MSCC had a contractual right to terminate the Licence if the fee was not paid. GM constructed a spillway on MSCC's land to channel water into the canal under the terms of the Licence.

In October 2013, GM failed to pay the Licence fee when it fell due, despite numerous reminders from MSCC. In March 2014 MSCC therefore gave notice to terminate the Licence, citing breach of contract. MSCC did however suggest that it would agree to grant a new temporary licence – for an annual fee of £450,000.

The arguments

GM accepted that the Licence had been validly terminated, but brought a claim seeking relief from forfeiture.

MSCC argued that GM had no possessory right (i.e. no right to occupy and control the land, because under the Licence it only had a right to use the land), so the court had no jurisdiction to grant relief from forfeiture. In the alternative, if the court did have jurisdiction, then the negotiations for the new licence (at the higher rent) were based on the shared assumption that the termination of the 1962 was irrevocable, and an estoppel by convention had therefore arisen – meaning it would be unfair for GM to be granted relief, because of the agreed position.

The court was required to determine whether:

1. it had jurisdiction to grant relief from forfeiture in the first place, by implying a right to relief; and, if it did,
2. whether GM was “estopped” from relief because of the negotiations that had been underway for the new licence; or
3. whether the court should grant GM relief from forfeiture.

The judge decided it was appropriate to grant relief from forfeiture

The court decided that relief from forfeiture was not just confined to cases where there was an interest in land, but could arise where there were “sufficient” possessory rights – here, GM’s rights under the Licence were more than just contractual rights and “came about as close to a possessory right as it is possible to imagine”. This meant that the court had jurisdiction to consider the claim for relief.

MSCC's estoppel argument failed. The court was not satisfied that there had been an assumption by the parties that the termination of the 1962 licence was irrevocable, or that it would be unjust to allow GM to go back on such an assumption.

The only prejudice suffered by MSCC was the time and associated costs of negotiating the temporary licence. The court ordered GM to pay these costs – which reflects the usual position when relief from forfeiture is granted. The aim of a grant of relief is to put the parties back into the position they would have been in if the forfeiture had never taken place.

Although GM's breach was not deliberate, it was guilty of significant carelessness – and a delay of 12 months before the issue of proceedings. However, the court noted that MSCC would derive a considerable windfall if the court refused relief, because of the higher rent which MSCC sought to charge under the new licence. Whilst a windfall to one party is not enough to mean that relief should (or not) be granted, it is a factor that the court will take into consideration when ascertaining whether to grant relief from forfeiture.

Points to consider

Whether or not this point of law is appealed, the key take-home message is that if you have a good deal, stick to its terms – don’t expose yourself, as GM did, to both the termination of the agreement and also to a large legal bill. If it had simply continued to pay the annual fee, MSCC would have had no opportunity to end the Licence.

It is important to note that the facts of the case are quite unusual – for example, because the Licence was a perpetual licence granting extensive long-term rights. It may be that a more standard form of licence, or even easement, would not go quite far enough to be considered a possessory right – and would therefore not attract a right to relief.