Most landlords will have to deal with a tenant in arrears with their rent at some point. If that situation arises, what can landlords do to recover the arrears? The circumstances of the arrears, and of the leases, will be different in each case but this note aims to set out a summary of landlords’ main options for recovery:
- CRAR (Commercial Rent Arrears Recovery)
- Pursuing a sub-tenant
- Drawing down on a rent deposit
- Pursuing a guarantor or former tenant
- Serving a statutory demand
- Court proceedings.
Forfeiture, or “re-entry”, is the landlord’s right to terminate the lease if the tenant is in breach of any of its covenants.
Many commercial leases provide for the landlord to have the right of re-entry if rent remains unpaid for a specific period of time (usually between 14 and 21 days). If the provisions for re-entry within the lease have been satisfied, the landlord can in most cases peaceably re-enter the property and recover possession, thus terminating the lease. This is done by entering the property and changing the locks. Care needs to be taken that nobody is occupying the property at the time of re-entry: this is why most re-entries take place either very early in the morning or very late at night.
However, a landlord will need to consider whether it makes commercial sense for it to forfeit the lease: is the tenant solvent – in which case will the forfeiture put sufficient pressure on it to pay? Does it want to vacate the premises? If possession is recovered and the tenant does not apply for relief from forfeiture, will the property be easily re-let?
If a landlord is considering re-entry, it needs to be very careful not to waive its right to re-entry: it needs to ensure that it does not perform any act (such as accepting rent) which recognises the lease as still existing.
In April 2014 the common law remedy of distress was abolished, and a new procedure for commercial rent arrears recovery (CRAR) was introduced.
Essentially, the procedure allows a landlord of commercial premises to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover the value of the rent arrears. The enforcement agent must serve notices on the tenant setting out specific information at various stages at which the procedure is used.
In many instances, the threat of removing items from the property which are essential for the tenant to carry out its business (such as computers, printers, desks, chairs – anything which belongs to the tenant) will be a strong inducement to pay the outstanding arrears so that it can continue to trade.
Landlords should, however, think carefully about using the procedure because doing so will waive any right to forfeiture that may have arisen.
3. Pursuing a sub-tenant
A landlord can require a sub-tenant to pay the rent that it owes to the tenant direct to the landlord, rather than to the tenant. In order to do so, a landlord must serve a notice on the sub-tenant setting out the amount of rent the landlord has the right to recover from the tenant using the CRAR procedure, as well as confirmation that the tenant must pay its rent direct to the landlord while the arrears remain until the arrears have been paid or until the notice is withdrawn or replaced. The tenant will become liable to pay the sums specified 14 clear days after the notice has been served.
4. Drawing down on a rent deposit
Landlords should check whether a rent deposit deed was entered into at the time of the lease: if so, this will usually give the landlord the right to draw down from the rent deposit if a tenant is in arrears of rent. The tenant will likely need to be notified that the draw-down is being made, and that they will be required to put additional funds into the rent deposit account to replace those funds which have been drawn down.
Where this option exists, it can be a useful method to recover some (although in many cases, not all) of the rent arrears due.
5. Serving a statutory demand
A statutory demand is a written demand for payment which complies with certain statutory requirements, and which is served on the tenant. The amount demanded and owed by the tenant must be more than £750 (if the tenant is a company). If the tenant does not make payment of the amount demanded within three weeks, the landlord can issue a petition to wind up the tenant’s business: that can often be an effective threat in encouraging the tenant to pay outstanding arrears. Statutory demands are generally inexpensive to prepare, and can result in tenants paying arrears quickly.
If the tenant is an individual, the amount demanded and owed must be more than £750 if the demand is served before 1 October 2015, and more than £5,000 if served after 1 October 2015. If the amount demanded is not paid within three weeks, the landlord can issue a petition for bankruptcy.
6. Pursuing a guarantor
Where a person or company has agreed to act as a guarantor for the tenant’s covenants under the lease, it is open to a landlord to consider pursuing them if the tenant is in arrears of rent. Depending on the provisions in the lease and the guarantee given by the guarantor, the usual way to enforce the guarantor’s obligations would be to issue court proceedings. A landlord may also, in certain circumstances, be able to claim against a former tenant of the premises.
7. Issuing court proceedings
A landlord can, of course, issue court proceedings to recover the debts owed by the tenant. Although an effective tool, unless court proceedings are absolutely necessary they are often rejected in favour of other methods of recovery because they can be expensive, and it can take months to receive a hearing date, let alone a trial date.
8. Next steps
This note is intended to be a brief overview of some of the remedies available to landlords where commercial rent arrears have accrued. Carter Lemon Camerons LLP specialises in finding tailored, cost-efficient solutions to clients’ problems, and in helping landlords recover commercial rent arrears as quickly and efficiently as possible.
If you would like advice about any of the remedies set out in this note, or any other aspect of recovering commercial rent arrears, please contact Emily Detheridge (EmilyDetheridge@cartercamerons.com) or Lisa Ginesi (LisaGinesi@cartercamerons.com).
Emily Detheridge is an Associate in the firm’s litigation department.
16 April 2015