It’s an all too common problem, the Tenant’s business hits a tricky patch and all unsecured creditors of the business, not least the Landlord suffer for it.
If you do find yourself in this unfortunate position, what are your options as Landlord?
In cases of arrears, most commercial leases allow for forfeiture by re-entry. Forfeiture is the process of the lease being terminated because of the tenant’s breach. Once the lease is forfeit, the tenant needs to obtain an order from the Court to be allowed back into occupation unless the Landlord agrees to grant a new lease.
Re-entry can take place in a technical sense by the issue and service of a possession claim or in certain circumstances, by literally re-entering property and changing the locks.
Forfeiture can be the quickest and cheapest way to deal with a defaulting tenant but is it always the best way?
If the landlord terminates the lease they become responsible for the outgoings including rates. The landlord also takes over the obligation to repair (assuming the tenant was responsible under the lease) and becomes the occupier for the purposes of the Occupiers Liability Act (in the event of third party injury). The expense involved can be substantial.
What are the other options?
Commercial Rent Arrears Recovery (CRAR)
Under the process known as CRAR you can engage enforcement officers to recover rent.
CRAR is the modern equivalent of the old law of distress but with much greater limitations. Notice must now be served taking away the surprise factor and the amount recoverable is limited to rent excluding sums reserved as “rent” such as service charge and insurance.
CRAR does have its benefits, not least the extra pressure from the embarrassment factor of enforcement officers turning up. CRAR also does not bring the lease to an end.
Landlords should not forget that a lease is a contract which is breached when payments are missed.
A claim for breach of contract doesn’t end the lease. It is also possible to obtain a Judgment for all outstanding sums due under the lease and not just the main ‘rent’. Once the landlord has a Judgment, there are various enforcement options including using enforcement officers, this time for all sums due.
Landlords should note that there is now a new pre action protocol for debt claims. The new protocol allows debtors more time to respond and to ask questions which triggers further delays before a claim can be brought.
Insolvency action including bankruptcy (individual) or winding up (company) may also be worth considering if the arrears are substantial, particularly for tenants who have other asset and sites and perhaps do not care (indeed may prefer) if their lease is cut short on a particular property.
Choosing the right option is crucial and prompt legal advice could play a huge role in reducing potentially significant losses.
Posted on January 31, 2018