How to recover commercial rent arrears

In the first of a two-part series, Paul Henson and Amy Wagg offer an update on the avenues available to commercial landlords when their tenants are in rent arrears. The pandemic may be behind us, but tenants in a number of sectors are still struggling with economic headwinds. Landlords will inevitably have to deal with the resulting rent arrears and grapple with the relative advantages and disadvantages of the options available for seeking recovery. This article will focus on commercial landlord and tenant relationships, but there are many additional residential protections for tenants that landlords need to consider if dealing with residential portfolios. Forfeiture Forfeiture is the landlord’s ultimate remedy where there are rent arrears, as it allows the landlord to terminate the lease agreement with its tenant and seek possession. However, a well-advised landlord should only consider this if it is content to recover its property and can readily relet it without an extended void period, which would see it without any incoming rent and also liable for the payment of business rates. Forfeiture is a complex area of law with many traps for unwary landlords, warranting its own article, but some key points to note are: To exercise this option, the lease is required to have an express forfeiture clause permitting the landlord to re-enter. It will typically stipulate that a landlord can do so when a tenant is in arrears of “rent(s)”. Rent(s) can include service charge and insurance if these are reserved as rent under the relevant lease. There is usually a grace period of 14 to 21 days after the rent falls due before the landlord can exercise its rights to forfeit. Once the grace period expires, the landlord can forfeit through issuing court proceedings and, once they are served on the tenant, the lease is considered forfeit. Alternatively, the landlord can forfeit by physically re-entering the property and changing the locks. No formal notice under section 146 of the Law of Property Act 1925 is required to be served on the tenant before forfeiture for non-payment of rent (unlike where other tenant breaches of covenant are involved). Landlords need to be careful not to inadvertently “waive” their right to forfeit where, despite having prior knowledge of the breach complained of, they continue to the recognise the existence of the lease. The classic example is a landlord demanding further rent by invoicing or accepting rent from a tenant after it has taken steps to forfeit the lease. The tenant (or indeed any subtenant or mortgagee) can seek relief from forfeiture which, if granted, aims to restore the lease as if no forfeiture occurred. It effectively puts the parties back into the same position and the lease is revived as if it has never been determined. In certain cases, automatic relief may apply if the tenant pays all rent in arrears and costs before the possession hearing date. Importantly, relief from forfeiture is a wide-ranging discretionary remedy available to the courts and can be applied to the specific circumstances of each case. Commercial rent arrears recovery “Sending in the bailiffs” to seize a tenant’s goods used to be a potent and well-utilised weapon in the landlord’s armoury for rent recovery. However, this common law right was significantly changed in 2014 with the introduction of commercial rent arrears recovery in the Tribunals, Courts and Enforcement Act 2007. CRAR now provides a structured method for landlords to recover commercial rent arrears, but imposes a number of restrictions, particularly concerning the rights of tenants and sub-tenants, and the procedural requirements that must be followed by enforcement agents. The CRAR process can be used when a tenant is in rent arrears and a landlord wants to apply to seize goods from the tenant equivalent to the value of the debt. The landlord may also serve notice requiring a sub-tenant to pay the rent owed under the sublease directly to the landlord, rather than to the defaulting tenant, until the amount of arrears is settled. If the sub-tenant also fails to pay, the landlord can exercise the CRAR procedure against the sub-tenant. If a landlord is considering CRAR, then it should be aware that: It cannot be used for mixed use or residential properties, only commercial. It must first decide whether it is preferable to forfeit the lease, as exercising CRAR waives any right to forfeit for non-payment of rent. It can only be used for “rent” arrears and not where a tenant is in arrears of service charge and/or insurance rent. It must also use a certified enforcement agent, and that agent must give the tenant seven days’ notice of their intention to attend the property to seize goods. This gives a tenant the potential opportunity to dispose of assets before seizure can take place. Court proceedings The court process can also be used to recover rent arrears by issuing a money claim. Before considering this route, the landlord should first ensure the tenant has the financial means and assets to enforce any judgment it might obtain. A landlord will not want to incur the further time and legal cost this process will incur if they cannot get their arrears at the end of it. The recent introduction of the fixed recoverable costs regime also means that, for monetary rent arrears claims under £100,000, the amount of legal costs a landlord can recover from its tenants will be limited. Assuming a claim is issued, a tenant can either: agree to pay the rent arrears and costs voluntarily; admit the debt and judgment is obtained on behalf of the landlord (which it then needs to enforce); fail to respond to the claim and a default judgment will be obtained for the landlord; or seek to defend the proceedings. If the landlord considers the tenant’s defence is without merit it can apply for “summary judgment” without the need for trial and the attendant legal costs that will arise. With commercial rent claims the landlord can often rely on the anti set-off clause in the lease which, if drafted clearly, is designed to prevent a tenant from deducting any claims they may have against the landlord from the rent they owe. Once judgment is obtained for the rent arrears, there are various enforcement options available to landlords to recover their judgment debt. We briefly summarise the options below, but each one requires detailed consideration: Taking control of the tenant’s goods This is a similar process to CRAR but with less restrictions and, in short, the landlord engages a certified enforcement agent to attend the tenant’s property to collect money or goods in order to sell them to satisfy the debt. Third-party debt order With a successful application to the court, a landlord can intercept payment of money that might be due to the tenant from a third party and use it to satisfy the judgment debt. This method is most commonly used to obtain funds held in a tenant’s bank account. Charging order This secures the judgment debt against a tenant’s property (if they own any). Property can include land and securities such as shares. The judgment arrears are realised when the tenant comes to sell the property as the judgment debt will be paid before any net proceeds of sale are paid to the tenant. The judgment debt will of course rank below any other secured creditors. A charging order does not compel the tenant to sell the property, but it can be used by a landlord to force a sale of the property through obtaining what is known as an order for sale. Attachment of earnings Where the tenant is employed, a landlord can apply to the county court and, if successful, the attachment of earnings order is sent to the tenant’s employer and requires them to withhold an amount from the tenant’s earnings each pay day. Insolvency If the tenant won’t pay rather than cannot pay (due to lack of available assets) the landlord might consider relying on the non-payment of the judgment debt to seek the bankruptcy of an individual or winding up of a corporate tenant. This will not necessarily recover the debt owed, but if an insolvency practitioner is later appointed they have the power to sell the recalcitrant tenant’s assets to recover the debt on behalf of the creditors. Next time We will examine the landlord’s options of agreeing a surrender with their tenant or other commercial arrangement, we will consider claims they might have available against third parties and, finally, look at how they might utilise any rent deposit monies. Paul Henson is a partner and Amy Wagg is a solicitor at Irwin Mitchell READ MORE Part 2: Commercial rent arrears: third parties, rent deposits and surrender Image © iStock