Introduction 
A tenancy agreement may expressly provide the landlord with a right of forfeiture on specified events such as non-payment of rent or non-observance by the tenant of the covenants of the tenancy agreement. If upon the happening of a specified event, the landlord elects not to exercise its right to forfeit the tenancy, such right of forfeiture may be waived. Further, such waiver may, depending on the nature of the specified event, be binding on the landlord’s successors-in-title for the remainder of the term of the tenancy. In Ever Score Development Ltd v Hang Heung Foods (Group) Ltd LDPE 1146/2014, the Lands Tribunal examined the law on waiver of forfeiture and held that while the tenant had breached the covenant not to sub-let, the landlord (and its successors-in-title) did not waive the right of forfeiture and was therefore entitled to seek, among others, possession of the property.

Background
By a tenancy agreement dated 20 January 2011 (the “Tenancy Agreement”), Mr. Cai as landlord agreed to let to the Respondent as tenant certain factory units and car parking spaces at an industrial building (collectively referred to as the “Property”) for a term of 8 years. Under the Tenancy Agreement, the Respondent agreed not to sub-let the Property or any part thereof to any person except with the prior written consent of the landlord; otherwise the lease shall absolutely determine and the Respondent shall forthwith vacate the Property on notice to that effect from the landlord. The Tenancy Agreement was signed by Mr. Cheng, the sole director and shareholder of the Respondent.

In May 2012, the Respondent sub-letted one of the factory units of the Property to a sub-tenant by a sub-tenancy agreement (the “Sub-Tenancy Agreement”). In September 2013, Mr. Cai sold the Property to Mr. Cheng by a sale and purchase agreement (the “SPA”). The Property was then sold to the Applicant by way of mortgagee sale on 30 September 2014. Mr. Wong, a director of the Applicant, suspected that there may be situations of sub-letting as he discovered that the occupiers of the factory units were not the Respondent when he visited the Property to inform the occupiers of the change of ownership. Sub-letting was later confirmed when Mr. Wong was provided with a copy of the Sub-Tenancy Agreement. 

The Respondent had failed to pay rent to the Applicant since 30 September 2014 despite demand had been made by the Applicant. Pursuant to Part V of the Landlord and Tenant (Consolidation) Ordinance (Cap. 7), on 19 November 2014, the Applicant filed an application to the Lands Tribunal against the Respondent and sought a possession order, arrears of rent and mesne profits on the ground of non-payment of rent and breach of the Tenancy Agreement by sub-letting without prior written consent from the landlord.

The Respondent’s Arguments
At trial, the Respondent raised, among others, the following arguments:-

1.         While it was admitted that there was a breach of the Tenancy Agreement in the sense that there was no written consent from the landlord for sub-letting of the Property, the Respondent contended that Mr. Cai had waived the right to forfeit the Tenancy Agreement based on such breach; and

2.         Since sub-letting was a once-and-for-all breach (instead of a continuing breach), when the right to forfeit is lost by waiver, it was lost for the remainder of the existence of the lease. As such, the Respondent argued that Mr. Cai’s waiver would be applicable to and binding on all successors-in-title (including Mr. Cheng and the Applicant).

The Tribunal’s Decision

Was sub-letting a once-and-for-all breach or a continuing breach?
The first issue before the Tribunal was whether sub-letting was a once-and-for-all breach or a continuing breach.  The English Court in Scala House & District Property Ltd v Forbes & Others [1974] QB 575 held that a breach of a negative covenant not to assign underlet or part with possession was a once-and-for-all breach and was never capable of remedy.

In the present case, the Tribunal relied on the Scala House case and held that sub-letting was a once-and-for-all breach. As such, if it was found that Mr. Cai had waived the forfeiture, both Mr. Cheng and the Applicant would be bound since the right of forfeiture could not be resurrected.

Was there waiver of forfeiture?
The next issue was whether Mr. Cai, Mr. Cheng and the Applicant had waived the right of forfeiture. 

The essential elements of waiver of right of forfeiture are:-

1.         Actual knowledge of the relevant breach by the landlord (or knowledge to be imputed to him from knowledge of his agent);

2.         Unequivocal acts by the landlord (or his agents) which are consistent only with the continued existence of the lease; and

3.         Communication of the implicit recognition of the continued existence of the lease to the tenant.

The Tribunal held that Mr. Cai had never consented to sub-letting and did not have actual knowledge of the Respondent’s breach nor any knowledge of such breach could be imputed to Mr. Cai by reason of the following matters:-

1.         It was Mr. Cheng’s evidence that he did not know whether Mr. Cai had agreed to the sub-letting or it was only Mr. Chung (the alleged agent of Mr. Cai) who told him that Mr. Cai had agreed. In any event, the Tribunal considered that there was no evidence to show that Mr. Chung was Mr. Cai’s agent;

2.         If Mr. Cai was aware of the fact that Mr. Cheng was minded to sublet part of the Property, he would not have allowed a clause prohibiting sub-letting contained in the Tenancy Agreement without giving Mr. Cheng a written consent to the sub-letting; and

3.         Under the SPA, the Property was sold subject to and with the benefit of the Tenancy Agreement. Mr. Cai specifically warranted, among others, that there was no breach of the terms of the Tenancy Agreement on the part of the tenant (i.e. the Respondent) (the “Warranty”). The Tribunal considered that if Mr. Cai was aware of the Respondent’s sub-letting, he would not have given the Warranty. The only reasonable inference to be drawn from the existence of the Warranty must be that Mr. Cai was not aware of the sub-letting and the breach of the Tenancy Agreement.

As such, Mr. Cai had never waived the right of forfeiture.

Regarding Mr. Cheng and the Applicant, the Tribunal held that:-

1.         Mr. Cheng was not aware of the breach by sub-letting and hence he had not even considered the waiver of the forfeiture; and

2.         The Applicant had actual knowledge of the Respondent’s sub-letting upon receipt of the copy of the Sub-Tenancy Agreement. The Applicant immediately instructed its solicitors to issue letter to demand for delivery up of vacant possession on the ground of the subletting and arrears of rent. The Applicant’s conduct showed that the Applicant had not waived the right of forfeiture but instead had exercised its right of forfeiture upon actual notice of the sub-letting.

Conclusion
The Tribunal found no waiver of the right of forfeiture by Mr. Cai, Mr. Cheng or the Applicant. As the Respondent had admitted its breach of the Tenancy Agreement, the Applicant was entitled to have the relief sought. This case illustrates that a breach of sub-letting is a once-and-for-all breach and if it is found to have been waived by the landlord, such waiver will be binding on the landlord’s successors-in-title.

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.