Landlord Remedies – Unpaid rent!
There are various remedies available when a commercial landlord cannot recover rent from their tenant. Daniel Harley our property litigation expert reviews some of the options available.
A common problem landlords face is that by unsuccessfully pursing one particular remedy, they inadvertently give up their right to use another. If a tenant defaults, landlords should think carefully about how they respond rather than simply reacting.
Before we move on to the options, the bulk of this article was produced before the Covid-19 pandemic hit and the governments emergency legislation has had an impact on the topic. In particular, as at the date of publication, there is a ban on using forfeiture (see our article on the subject) but we thought it was helpful to set out the position anyway for future reference.
So far other forms of enforcement have not been effected in a legal sense although there may be an impact in practical terms (can you find anyone to exercise CRAR for example?). We will provide further updates if there are any change.
Now back to the subject in hand.
In other words , taking back possession of the property either by changing the locks or by an order of the court, forfeiture terminates the lease. Most commercial leases include a clause which allows re-entry and allows the landlord to recover possession of the property but it is not a given, particularly if the lease wasn’t drafted by professionals. It is also worth noting that you cannot simple “re-enter” if there is a residential element to the property.
Landlord’s needs to think carefully whether it makes commercial sense take this option and consider:
- Is the current rental market strong? If it is not, then it may be better to keep the current tenant on the hook for the rent and maintaining the property and look at other options to recover the money;
- If the lease does come to an end, the rates which will become payable by the landlord can be substantial;
- Even if a new tenant can be found, they may not agree to pay a rent as high as the previous tenant (depending on the market at the time).
It is also worth noting that if the Landlord acts in a way which would suggest that the lease is continuing (demanding rent for example), the right to forfeit can be waved.
Rent Deposit Drawdown
At the start of the lease, some landlords will require a deposit to be in place to help towards any rent arrears or any other sums due under the lease. An option where the tenant misses a rent payment is to apply the deposit against the arrears.
There are few points to consider:
- Check the terms of the Rent Deposit Deed for any limitations/ processes which need to be followed to allow the deposit to be taken.
- Check the provisions regarding asking the tenant to “top up” if money is transferred from the deposit and make sure the tenant complies, it might be needed later.
- If there is a drawdown on the rent deposit, the landlord could waive the right of forfeiture. Is the timing right, is it better to wait until after forfeiture when the deposit can be offset against arrears and any dilapidations etc?
- Note that if the tenant goes into administration but the tenant’s business continues to occupy the property then the rent will be payable as an expense of the administration. The Court has recently confirmed that the “top up” mentioned above is not payable as an expense of the administration.
Pursuing a guarantor or former tenant
Sometimes, a guarantor or a former tenant may enter into a guarantee which provides that if the current tenant defaults on payment of rent, the rent arrears will be picked up by them instead. A notice under section 17 of the Landlord and Tenant (Covenants) Act 1995 will need to be served on the third party within six months of the arrears being incurred otherwise you may lose the right to claim. Consider whether there have been any assignments of the lease and check whether a former tenant may still be liable.
Rent arrears is effectively a debt and as such Court proceedings can be issued and are useful if the tenant has other assets a landlord wants to enforce against (property etc) which would require a judgment (often referred to as a CCJ) before enforcement.
Commercial Rent Arrears Recovery (CRAR)
This method of enforcement relates only to commercial property and essentially allows the landlord to appoint an agent (often colloquially referred to as a bailiff) to take control of the tenants goods and sell them to recover the debt. A landlord needs to remember:
- It is only the principle rent you can recover ie it does not including other “rents” e.g. insurance rent/service charges etc.
- There is a strict procedure to follow.
Despite the limitations of CRAR compared to the old law of Distress, the threat of bailiffs turning up at business premises will often bring about payment.
Statutory Demand and Insolvency
Where there is no dispute as to the debt (it’s hard to dispute rent arrears) then a Statutory Demand is an option. A statutory demand is the precursor to a bankruptcy or winding up petition which in certain circumstances can be an effective recovery method although bear in mind that triggering an insolvency method will benefit all creditors and not just the creditor applying.
Sometimes the best option is to try and preserve the landlord/tenant relationship if non-payment is simply a temporary issue. However this type of agreement needs to be drafted carefully because a landlord may run the risk of compromising the right to pursue other methods of recovery.
Main Points landlords should consider
- Are there any other breaches that need to be remedied, repair etc?
- Is taking the property back really the best option?
- What other options might be available?
- Have you got an action plan before contacting the tenant to avoid potentially losing certain rights?
- How solvent is your tenant? More on this topic in our next article! Watch this space.
- Are there any guarantors or former tenants that can pay the arrears instead?
For an in-depth assessment as to which remedy would be most suitable for you, get in contact with our dispute resolution team on 0115 9100 200
Posted on April 22, 2020