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A short guide for commercial landlords faced with rent arrears and the options available to them.
Forfeiture
Forfeiture is a landlord’s right to bring a lease to an end as a result of a tenant’s breach. Forfeiture should be considered first as any demand for or acceptance of rent that fell due after the right to forfeit arose, will waive the right to forfeit. This right can only be exercised if specific requirements are met. A landlord should always check the terms of the lease before taking any action.
Once forfeiture has been effected, the landlord and tenant do not have any continuing liabilities under the lease, although they remain liable for any breaches which occurred prior to the forfeiture. It is possible for a tenant to apply for relief from forfeiture. As a general rule, where a lease is forfeited for non-payment of rent, the court will grant relief where the tenant pays all arrears and the landlord’s costs. In that case, it will be as if the lease was not forfeited.
Forfeiture is not always the most appropriate or efficient remedy and careful consideration should be given to the merits and risks of each case.
CRAR
The Commercial Rent Arrears Recovery (CRAR) regime allows landlords of commercial premises with a written lease to recover rent arrears by taking control of a commercial tenant’s goods and selling them. It is undertaken by enforcement agents. The enforcement agent must give 7 clear days’ notice to a tenant prior to enforcement. CRAR can only be used for rent and any interest payable under the lease. It does not include rates, council tax or service charges. The net amount outstanding must exceed a specified minimum.
If the commercial property is subleased, it is possible for the landlord to pursue the arrears from both the tenant and sub-tenant.
Court proceedings
Rent arrears can also be recovered by issuing a claim. A claim letter is required before proceedings are issued following the appropriate pre-action protocol. Court proceedings are generally slower and more costly than other methods of rent arrears recovery. If it is a relatively simple matter and the defendant has no real prospect of successfully defending the claim, the landlord may be able to apply for summary judgement, which can be more efficient. Once judgment is obtained, a landlord can take enforcement action. If the tenant has no income or assets, it may not be possible for the landlord to recover the rent arrears.
Guarantors and Former Tenants
If there is a guarantor, the landlord can pursue the guarantor for the rent arrears. This can be an effective way to recover rent arrears, particularly if the tenant is in financial difficulty. Before any steps are taken, the guarantee provisions in the lease should be reviewed to determine the extent of the guarantor’s liability and any rights that they may have.
Statutory demand and winding up/ bankruptcy petition
Serving a statutory demand is an initial step to commencing bankruptcy or winding-up proceedings. A statutory demand can be effective, as it puts pressure on a tenant (or guarantor) by raising the real possibility of bankruptcy or insolvency. A statutory demand can only be served where the debtor owes at least the minimum sum (£750 if the debtor is a company and £5,000 if the debtor is an individual) and the debt is liquidated and undisputed.
Once a statutory demand has been served, the debtor has 21 days in which to settle the sum. After this period has passed, the landlord can present a bankruptcy or winding-up petition to the court, unless the debtor has made an application at court to prevent this.
Depending on the tenant’s financial position, this option may not be worth pursuing because the landlord will rank only as an unsecured creditor in any bankruptcy or liquidation. In practice, the landlord may recover only a small percentage, if anything at all, of the original debt.
Rent deposit
If there is a rent deposit, landlords have the option to draw down from this. However, the terms of the rent deposit agreement will need to be reviewed. This is usually an efficient way of recovering some of the rent arrears almost instantly, but less money may be available to cover future liabilities if the tenant does not top up the deposit.
Insolvency
Before taking any action the landlord must consider if the tenant is in any form of insolvency, and if so, what implications this has on the methods of recovery available.
How Can CWJ Help?
We have expertise in acting for landlords who are faced with these issues. If you need advice in relation to this, we can help.
We will work with you to review your position and determine the best option available to you to recover rent.
For further information call Jill Lawton on 01689 887855 or by email Jill.lawton@cwj.co.uk