Forfeiture of Lease Insurance
Forfeiture is a technical and complex aspect of landlord and tenant law.
Many leases contain clauses that may entitle the landlord to determine (terminate) the lease in the event of:
- Non-payment of rent or other payments for which the tenant is liable under the terms of the lease
- The tenant’s breach of another covenant in the lease
- Tenant insolvency or where the tenant is made bankrupt, or in the case of a company, goes into liquidation, receivership or enters into voluntary agreements with any creditor.
A lender who is providing a loan secured against a leasehold interest deriving from a lease that contains forfeiture provisions may be concerned that having lent the money they have little or no real control over the activities and actions of their borrower, the lessee.
Concerns may also arise where a superior or head lease contain forfeiture provisions that may entitle the superior landlord to determine (terminate) that superior lease or headlease. The likely grounds for determination would be the same as set out above in relation to forfeiture of a lease, but would be higher up the chain of interests in the property, and may relate to matters that the subtenant or occupational tenant has no influence or control over.
Another situation that may give rise to concern is where the lease does not require the landlord to reinstate the property or does not set out how proceeds of any buildings insurance policy will be distributed in the event the reinstatement of the property cannot be achieved, or the lease allows the landlord to forfeit the lease following destruction of the property.
Why take out forfeiture of lease insurance?
Notwithstanding that relief from forfeiture may be available in the event that the landlord starts forfeiture proceeding, a lender who is providing a loan secured against the leasehold interest in a property where the lease contains forfeiture provisions, may be concerned that by the time they learn of the landlord’s actions, their right to seek relief through the courts has been lost.
Forfeiture of lease insurance provides a lender with additional protection against financial losses that they could suffer in the event of the landlord forfeiting the lease, which is the security for a loan that they have provided.
An underlessee who is investing money in fitting-out a business premises, may have concerns that they will be unable to recover the costs of such fit-out and may incur additional costs and losses in the event that a superior or head lease is forfeit.
Forfeiture of lease insurance benefits
Forfeiture of lease insurance provides protection against financial losses that might arise in the event of the landlord determining (terminating) a lease.
Generally, a policy will provide a lender with cover for loss relating to:
- Loss in connection with the mortgage or loan resulting from the exercise of the determination clause
- All other costs and expenses incurred with the prior written consent of the Insurer
In the case of forfeiture of head lease or forfeiture in the event non-reinstatement following damage or destruction of the building of the property, cover may be extended for the benefit tenant to cover:
- Fit-out costs
- Relocation costs
- Loss of profit
A forfeiture of lease insurance policy is usually non-assignable and provides cover for a specified period.