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Forfeiture of Residential Long Leases

For sometime there has been debate as to whether a County Court default Judgment satisfied the requirements of Section 168 of the Commonhold and Leasehold Reform Act 2002 (“the 2002 Act”) and section 81 of the Housing Act 1996 (“the 1996 Act”)

The section of the 2002 Act provides that a Landlord cannot serve a forfeiture notice in respect of a tenant’s breach of covenant until a Court or Tribunal has determined that the breach has occurred. The 2002 Act introduced a special procedure for the Leasehold Valuation Tribunal (“the LVT”)to determine breaches of covenant. The 1996 Act provided that there needed to be a final determination or agreement before forfeiture could take place.

Many landlords continued as part of their debt collecting processes to issue proceedings in the County Court and obtain default judgements which they then relied upon to seek forfeiture. If claims for service charges in the County Court are defended then often they will be transferred to the LVT for a determination. Until recently it was not clear as to whether a default judgement was a final determination with two results in cases, one saying it was a default judgement and the other the opposite.

In Church Commissioners v. Koyale Enterprises and Thaleshwar [2012] 21 EG 96 at first instance the District Judge determined that a default judgement was not a final determination and therefore section 81 of the 1996 Act was not satisfied. The landlord appealed.

The matter then came before HHJ Dight at Central London County Court. He ruled that where a default judgement had been entered the issues were to be treated as “determined” between the parties and that for the purposes of section 81 of the 1996 Act a default judgement was a determination.

In his view the leaseholders had been provided with an opportunity to mount a challenge to the charges if they had chosen to do so. Simply deciding that a default judgement was a “final determination “did not prevent the leaseholders form subsequently challenging (e.g. making an application to set aside the judgement). The judge was concerned that requiring an actual hearing in circumstances where no defence was filed would be unfair on landlords and increase pressure on the courts. For all of these reasons the judge decided that a default judgement was a final determination.

It seems that the judge was perhaps swayed by the practical difficulties that would arise if a default judgement was not a final determination. This may require landlords in service charge cases to require the Court to hold a hearing even when the leaseholders had not looked to defend. Clearly at a time when the Court Service is under enormous pressure this was not appealing particularly given the whole process of seeking a judgement does allow the defendant an opportunity to appeal.

What this case means is that in respect of service charge arrears recovery freeholders and landlords can rely upon County Court default judgements as the basis for forfeiture. For landlords this system is seen as relatively quick and user friendly for the majority of claims which are not defended. If a landlord thinks a matter may be defended they may still wish to consider whether to use the County Court or the LVT and both options are open. Hopefully we do now have some clarity on this difficult issue although the Courts still remain reluctant to forfeit a residential lease for what are often modest service charge arrears when considered against the value of the leasehold interest.

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