Derwent Lodge Estates Ltd v Signature Living Hotel Ltd (in administration) & others [2025] is a rare case in which the courts have had to consider the basis on which residential subtenants in a mixed-use building should be granted relief where a superior lease has been forfeited.
We look at the Judgment below which may be of considerable importance to future cases involving mixed-use developments with complicated leasehold structures.
WolfBite - the key takeaways
• Forfeiture gives landlords the right to terminate a lease early.
• Where a landlord exercises the right to forfeit, it is open to the tenant, subtenants, mortgage lenders and other interested parties to seek relief from forfeiture.
• If a subtenant or mortgage lender applies for relief from forfeiture, but the tenant does not, they will often seek a vesting order granting them a new lease.
• The court has a wide discretion when deciding the terms of such a vesting order.
• In Derwent, a Circuit Judge found that the court had been entitled to make a vesting order that made the residential subtenants responsible for the whole of the mixed-use building, not just the part they occupied.
• Requiring the subtenants to take over the obligations under the forfeited headlease put the landlord back into the position it was in before forfeiture.
• This was a fair basis on which to grant relief, and within the bounds of the court’s discretion.
What is forfeiture?
Forfeiture gives the landlord the ability to terminate a lease early either where the tenant is in breach of an obligation under a lease or when some other specified event happens (such as the tenant’s insolvency).
The right to forfeit will usually be expressly set out in most modern leases and, if it is not, the right will only be implied in limited situations.
The ability to forfeit a lease is a very important right for a landlord and viewed as being security for the performance of the tenant’s covenants.
The threat of forfeiture may deter a tenant from breaching its obligations, or compel it to remedy any breach that it has already committed. If a tenant does not or cannot remedy a breach, forfeiture provides a landlord with a means to recover possession.
There may be circumstances in which a landlord will not wish to forfeit a lease, such as where it may struggle to find a new tenant given the state of the letting market. There may also be alternative remedies the landlord may prefer to pursue, for example bringing a claim for rent arrears, drawing down on a rent deposit or pursuing a guarantor.
However, where the right to forfeit exists, it is an incredibly powerful tool in the landlord’s armoury.
If the right to forfeit arises, and the landlord exercises it, the lease will end.
Subject to some limited exceptions, any subleases granted underneath it will also terminate. This is sometimes explained using the analogy “the branch falls with the tree”.
The right to forfeit is, though, subject to various common law and statutory rules.
For example, for breaches of lease covenants other than non-payment of rent, the landlord will need to serve a notice under section 146 of the Law of Property Act 1925 (LPA 1925) setting out the breaches relied on and giving the tenant a reasonable period of time to remedy the breaches if they are capable of remedy.
Additional requirements apply for certain cases involving a breach of the tenant’s repairing covenants, and numerous hurdles have to be overcome when seeking to directly forfeit long residential leases.
Where residential premises are concerned, which includes mixed-use properties, the landlord can only forfeit by way of court proceedings.
When the right to forfeit arises, the landlord has an election to make. It can either proceed to forfeit the lease, or it can elect to treat the lease as continuing to exist (for example, by accepting further rental payments) in which case the landlord is said to have “waived” the right to forfeit in respect of that particular breach. Once the landlord has made its election, it cannot go back on it.
What is relief from forfeiture?
The right to forfeit is draconian in nature. It terminates the lease and all subleases.
To mitigate this, the common law and statute have developed the principles of relief from forfeiture.
A tenant that is facing forfeiture, or whose lease has already been forfeited, can ask the court for relief which, if granted, will prevent the lease from being terminated or restore the lease as if the forfeiture had never taken place.
Where the landlord has forfeited a lease due to non-payment of rent, the tenant will invariably obtain relief if it pays all of the arrears, and normally the landlord’s costs.
Where the landlord has forfeited a lease due to breaches of covenant other than the non-payment of rent (for example, because it has breached the repairing obligations), the court has a wide discretion whether to grant relief which derives from section 146 of the LPA 1925. The court will generally grant relief if the tenant remedies the breach(es), and the court is satisfied that the tenant will continue to perform its obligations in the future. The court will take various factors into account, such as whether the breach was intentional, the severity of the breach and if the landlord will obtain a disproportionate advantage from the forfeiture.
Crucially, it is not just the tenant that can seek relief from forfeiture.
Others with an interest in the property can also apply for relief, including subtenants and mortgage lenders. This is because the forfeiture of the headlease will result in subtenants losing their subleases and mortgage companies losing their security for the money they have lent.
If a tenant applies for and obtains relief from forfeiture, the lease will be reinstated, and subtenants and mortgage lenders will also be restored to their previous position.
However, the tenant might not apply for relief. Subtenants and mortgagees therefore have the ability to apply for relief themselves in order to protect their interests.
Broadly speaking, subtenants, mortgagees and other interested third parties have two options when applying for relief from forfeiture.
They can either seek relief in much the same way as the tenant can, which would result in the reinstatement of the original headlease (under section 146(2) of the LPA 1925).
Alternatively, they may prefer to seek a vesting order, which would result in an entirely new lease being granted to them in place of the forfeited headlease (under section 146(4) of the LPA 1925). The new lease will commonly, but not necessarily, be granted on the same terms and conditions as the forfeited lease.
The court also has the discretion to make a vesting order in respect of either the whole or just a part of the property comprised in the forfeited headlease.
In practice, a subtenant or mortgagee will often apply for reinstatement and a vesting order with one in the alternative to the other.
What happened in Derwent Lodge?
The case concerned a mixed-use property in Liverpool comprising a restaurant on the lower three floors, an event space on the roof terrace and 42 residential flats on floors 1 to 7 in-between.
The building had a rather complicated leasehold structure:
• Derwent was the freehold owner of the whole building.
• Derwent granted separate business leases of the restaurant premises and roof terrace, to two commercial tenants.
• Derwent granted a 998-year lease of the whole building to Signature Living for a premium and an annual rent of £80,000 (Signature Lease).
• Signature Living redeveloped floors 1 to 7 and granted 42 long residential leases, each for 250-years.
• Signature Living granted a 996-year lease of the residential flats (only) to Grey GR (Grey Lease), but retained repairing and maintenance obligations for the common parts and promised to perform its obligations under the Signature Lease which included obligations to keep the whole building in repair.
• Regrettably, Signature Living went into administration in 2020. It subsequently stopped paying the rent due to Derwent under the Signature Lease.
In August 2022, Derwent issued forfeiture proceedings.
On 16 September 2022, Derwent served the forfeiture proceedings. This had the effect of forfeiting the Signature Lease and terminating the Grey Lease and all 42 residential leases.
Signature Living did not seek relief from forfeiture.
However, the residential subtenants and some of their mortgage lenders did apply for relief from forfeiture. (Grey GR also sought relief, but it subsequently discontinued its claim.)
It appears from the judgment that the subtenants and mortgage companies only sought a vesting order for the grant of a new lease.
On what terms should relief be granted?
The main issue for the court was the terms on which a vesting order should be made.
Derwent proposed that the vesting order should grant a new lease on the same terms as the Signature Lease. In other words,
Derwent said that the subtenants should be granted a new lease vesting the whole of the building, meaning that the subtenants would be liable to pay the annual rent of £80,000 to Derwent; responsible for repairing and insuring the whole building; and result in their becoming the landlord to the commercial tenants.
The subtenants and mortgage lenders, on the other hand, proposed that the vesting order should be on the basis of the Grey Lease.
In other words, they said that the subtenants should only be responsible for part of the building, namely certain parts of floors 1 to 7, leaving Derwent with the repairing and insuring obligations for the wider building, main structure and common parts.
At trial, the District Judge preferred Derwent’s position and made a vesting order requiring Derwent to grant a new lease on the same terms as the Signature Lease.
As a condition of granting relief, the subtenants were required to form a new management company that would take the new lease.
That management company was, in turn, required to grant fresh leases to the individual subtenants in equivalent terms to the subleases they had lost.
The subtenants and mortgagees were also required to pay all of the arrears due under the Signature Lease, not just an apportionment that reflected their interest in a smaller part of the building.
The subtenants and mortgagees appealed to a Circuit Judge.
What did the Circuit Judge decide?
Given that this was an appeal against the exercise of the District Judge’s discretion, the Circuit Judge could only interfere with the exercise of that discretion if the District Judge had misapplied the law, taken into account irrelevant matters or failed to take into account relevant matters.
The Circuit Judge found no basis for interfering with the decision and was satisfied that the District Judge had been entitled to exercise their wide discretion as they had.
The appeal was dismissed accordingly.
The District Judge’s overriding consideration was to put the landlord into the position that it was in before forfeiture. The Circuit Judge considered that this principle was correct whoever was making the application for relief, whether a tenant or subtenant of the whole or a subtenant of only part of a building.
Before forfeiture, Derwent was entitled to receive an annual rent of £80,000 and its only covenant was to give quiet enjoyment.
Signature Living had taken over responsibility for the whole building, including full repairing and insuring obligations. The District Judge had therefore been entitled to exercise their discretion so that the subtenants should take on the same obligations as
Signature Living had under the Signature Lease, to put Derwent back into its pre-forfeiture position.
The District Judge had taken account of the fact that the residential subtenants had no desire to become landlords to the commercial tenants and were not professional building managers. They had considered whether it might be possible to make a vesting order in respect of only part of the building, excluding the business premises, but concluded that it would be wrong to do so if that would make it impossible for Derwent to deal with the building as a whole.
There was little judicial guidance as to what should happen in this type of scenario, where there are shared facilities, common parts and commercial and residential tenants with overlapping rights. The District Judge had been entitled to conclude that the cleaner solution would be to restore the leasehold structure that had previously existed, with the residential subtenants effectively stepping into Signature Living’s shoes.
As for the order requiring the subtenants to pay all of the arrears that Signature Living owed, and not just a proportionate part of those arrears, the Circuit Judge considered that there was nothing irrational or wrong about the District Judge’s decision and it was not inconsistent with previous authorities.
In short, the Circuit Judge found that the District Judge had been entitled to reach the conclusions they had on the facts.
Different Judges might have exercised the discretion in different ways on the same facts, but the District Judge in this case had acted within the bounds of the discretion they were exercising.
Comment
There are not many reported cases in which the courts have had to consider the basis on which relief from forfeiture should be granted where the application is made by subtenants and mortgagees.
There are fewer still that have had to grapple with some of the practical and legal difficulties that can arise when dealing with more complicated leasehold structures in some modern-day mixed-use developments.
Subject to any successful appeal, this case provides helpful insight into how the courts might approach similar applications for relief involving mixed-use buildings in the future, and serves as a useful reminder of the very wide discretion the court has when deciding on what basis to grant relief.
There is another, more nuanced, point of interest.
Technically, because the two business leases already existed at the time the Signature Lease was granted, the Signature Lease was what is called a “concurrent lease”.
There have been very few cases that have considered what happens to pre-existing leases when a concurrent lease is forfeited. It has generally been considered that those pre-existing leases will not end, because they were not created out of the concurrent lease - using the branch and tree analogy, the pre-existing lease is a branch on a different tree. Derwent seems to support this analysis because it appears to have been accepted that the two business leases did not terminate when the Signature Lease was
