For landlords of commercial premises, one of their main concerns is making sure that the tenant pays all sums due under the lease. Unfortunately this doesn’t always happen so what are the options for recovering unpaid rent? This note summarises the different methods of enforcing payment of rent and looks at the advantages and disadvantages of each.
Considerations before you take action
Before commencing any enforcement action to recover rent arrears you should think about the following points:
- Are you trying to preserve an ongoing relationship with the tenant? If so, is it worth trying to do a deal, perhaps agreeing payment in instalments, a reduced rent or a surrender of part of the lease?
- Would you like to get the property back? If so, you may want to forfeit the lease, in which case you need to take care not to waive the right to do so by taking any other enforcement action. Once the forfeiture has taken place you can then pursue the tenant for the arrears.
- Is the tenant in financial difficulties? If so, is there any kind of formal insolvency arrangement in place? This will impact on your ability to use some of the methods, as summarised at the end of this note.
What are your options for recovery of sums due?
Statutory demands and winding up petitions
Where the amount outstanding is £750 or more, and the tenant has the money, a statutory demand may well be effective to prompt payment. The failure to settle the demand opens the tenant to the risk that it could be declared bankrupt or placed into compulsory liquidation. It is quick and relatively cheap to do, though be aware that if there is any real dispute as to whether the amount claimed is actually due the tenant can apply to have the demand set aside, which can lead to an award of costs against the landlord. However, be aware that if the tenant simply does not have any money and you proceed to either bankruptcy or winding up the procedure may become expensive and you will probably only recover a proportion of what you're owed.
Does the tenant have a guarantor? If so, this may be a good starting point. Most guarantees are drafted so that the guarantor has a primary obligation to pay sums due and comply with tenant's covenants which essentially puts the guarantor in the same position as the tenant. Some guarantees require that a formal demand is served on the guarantor before he becomes liable, so make sure that this point is checked. Once you've established that the guarantor is liable, if he doesn't pay up then you can bring an action against him instead. However, the problem with current guarantors is that where the tenant is in financial difficulties, there's a good chance that the guarantor is too (as guarantors are often parent companies).
Subtenants – section 6 notice
Is there a subtenant in occupation of the property? If so, the landlord can serve a notice on that subtenant requiring that he pay his rent direct to the landlord until the arrears are paid off. In the event that the subtenant fails to comply with the notice the landlord is able to distrain directly against him (see “Distress” below). Where there is a solvent subtenant this is a very good remedy: the notice is relatively quick and easy to prepare and serve and the subtenant will almost certainly be happy to comply without further action being required. Note that the notice only covers arrears due at the time so further notices will be needed as further arrears accrue.
Previous tenants and guarantors
Are there any previous tenants or guarantors that may be liable? Depending on how often the lease has been assigned, for leases granted before 1996 you may find that you have a whole chain of possibilities; for leases granted after this time you are likely to be limited to the tenant (and possibly the guarantor) immediately before the current one. As with current guarantors, once you've established that someone is liable, if they don't pay up you can bring enforcement action against them.
An important point to note with regards to former tenants and guarantors is that you won't be entitled to any sums unless you serve a Section 17 notice within six months of the date on which the sum became due. If you miss this deadline you don't have any claim against them. Where a tenant is persistently failing to pay this may mean that you end up serving a series of notices: you need to stay on top of when the next one is due. You should also be aware that the former tenant or guarantor has a right to call for an overriding lease: if you don’t want a direct relationship with this party, this method may not be appropriate.
Distress for rent is a common law remedy which involves either the landlord or a qualified bailiff entering a tenant's premises and taking goods up to the value of the debt owed (limited to "rent" which may or may not include service charge, repair costs and insurance premiums, depending on the lease drafting). The advantage of distress is that it is fast and cheap and is an effective way of focussing the tenant’s mind. However, it is a draconian remedy and there are very strict rules about how and when it can be used, a breach of which will leave the landlord open to a damages claim from the tenant. It's only really useful against tenants with a large amount of valuable stock as there are limitations on taking items used for the running of the business. A landlord should also be aware that this remedy may restrict the tenant’s ability to trade, potentially causing further financial difficulties, and that storage and insurance of the goods may need to be arranged. This remedy will be replaced on 6 April 2014 by a new, statutory, commercial rent arrears recovery remedy.
This is usually a last resort, as the other options provide a quicker route to getting the rent paid. Before you can issue proceedings you have to send a letter before action. This in itself may be enough to trigger payment from a solvent tenant (or guarantor or former tenant). If it does not trigger payment, getting the money is unlikely to be a quick process but, provided that they have it, it will be an effective method. Provided that the sum is not disputed it should be possible to obtain summary judgment, which speeds things up.
The tenant may have provided a rent deposit, though this will usually be a last resort when seeking to recover unpaid sums as it’s preferable to keep this ready-source of money available for a time when all other options fail – a tenant who can’t pay up is unlikely to top up his rent deposit account. If you do decide to use the rent deposit, drawing against it is a quick and easy way of getting money that is owed. However, you do need to check the drafting carefully as the deed may limit you to withdrawals for unpaid principal rent, and may require that the tenant be given notice before any withdrawal is made: an unpermitted withdrawal will give rise to a claim against the landlord, so always take advice!
Different types of insolvency procedures have different effects on the various methods of enforcement. You should always seek legal advice before taking any enforcement action against an insolvent tenant, but to summarise:
- Administration: A moratorium means that no proceedings can be commenced or distress proceeded with without the consent of the administrator or permission of the court. The law is unclear on whether it is permissible to claim against subtenants. Whether or not a rent deposit is available depends on how it’s structured. Claims can still be made against guarantors and former tenants.
- CVA: No restrictions before approval by creditors; following approval the landlord is bound by whatever is agreed in respect of all past arrears. The CVA doesn’t necessarily apply to future sums, though there will often be a compromise of future claims for rent if the tenant is not in occupation. In addition there is a moratorium for “small companies”, the implications of which are the same as for administration. Guarantors and former tenants will generally be unaffected, though do check the terms of the CVA.
- Receivership: This does not generally restrict the landlord’s ability to enforce against the tenant. For administrative receivership you need to check how the rent deposit is structured before enforcing as the bank may have priority.
- Voluntary liquidation (solvent winding up): No restrictions on what the landlord can do, though another creditor may be able to apply to the court to prevent action being taken.
- Compulsory liquidation (insolvent winding up): Landlord may have to account to preferential creditors for distrained sums in the preceding three months. Following the order, leave is required to bring proceedings or distrain. Guarantors and former tenants will generally be unaffected.