Commercial Rent
Arrears - Landlords' Options
In these uncertain times, the most common problem
faced by a landlord is the failure by a tenant to pay its rent.
When a tenant is in arrears, there are a number of options open
to landlords.
If a rent deposit has been taken by a landlord
upon the grant of the lease to the tenant, the landlord has
the option of taking the arrears from the deposit but must follow
the procedure set out in the rent deposit deed to do so.
Unless the tenant is obliged to 'top up' the
rent deposit to its original amount upon each withdrawal, the
deposit will eventually become exhausted if there are persistent
arrears. If the tenant is insolvent, the landlord's ability
to make withdrawals from the deposit will depend on the nature
of it and the type of insolvency.
It is possible to issue Court proceedings against
the tenant to recover arrears of rent and these usually take
place in the County Court. The matter can be resolved with minimum
cost and delay if an early judgment can be obtained.
However, consideration needs to given to any possible counter-claim
which may result in a costly and time consuming trial, for example,
if the tenant alleges a breach of the landlord's repairing obligations
in the Lease.
A landlord has the option of serving a statutory demand upon the
tenant if the sum owed exceeds £750 and is undisputed. If the sum is not paid by
an individual tenant, the landlord may present a bankruptcy petition. If the tenant
is a company, a winding-up petition may be presented.
Where a lease has been granted before 1 January 1996, a landlord
is able to pursue all previous tenants back to the original tenant and any original
guarantor for arrears of rent.
For leases granted after 1 January 1996, a landlord is restricted
in pursuing former tenants and guarantors. In these leases,
the tenant's obligation to pay rent usually ceases on an assignment
of the lease, unless the outgoing tenant has been required to
enter into an authorised guarantee agreement which obliges the
outgoing tenant to guarantee the performance of the lease terms
by the incoming tenant, including payment of the rent. Thus,
the outgoing tenant can then be pursued in relation to rent
not paid by the incoming tenant.
A landlord must first give a formal notice to a former tenant
or guarantor if the landlord intends to recover rent arrears
from either of them.
Forfeiture of the lease is often seen as a landlord's
most effective means of enforcing the covenants of a tenant,
but it brings the lease to an end. In a falling market, a landlord
may prefer to sue for arrears alone, and not forfeit, so that
the premises remain occupied and other outgoings on the premises
(such as rates) continue to be paid.
Forfeiture may be effected by either:
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• court proceedings
(which may be costly and time consuming); or
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• in some cases,
peaceable re-entry onto the premises may be possible (but
the premises must not be residential or a mixed use lease).
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Before forfeiture can be effected, there are prerequisites which
must be met:
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• an express
provision in the lease providing for forfeiture;
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• breach by the
tenant of its covenants triggering forfeiture;
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• the right to
forfeit must not have been waived by the landlord; and
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• strict procedural
steps must be taken by the landlord.
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This new statutory scheme will enable landlords
to remove and sell tenants' goods on the relevant premises to
pay rental debts.
It will be available:
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• only for commercial
premises;
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• only where a
minimum amount of rent is due (clear of any set-off claims
by the tenant); and
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• only where a formal
written notice has been given beforehand to the tenant.
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The previous Government stated that the new regime will not come into effect
until 2012 at the earliest. The old remedy of distress, which is similar in nature,
will be abolished at that time because of concerns relating to human rights. We wait
to see whether the new Government will bring the new regime into force.
Guy Hitchin
MH Property
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