Dealing with tenants who don’t pay or otherwise break the terms of a lease may require one or more statutory solutions. Justin Michaelson outlines the legal implements that can help asset managers
We all know how difficult maximising returns on a property asset can be in certain circumstances. It may be a late-paying tenant, a tenant carrying out unauthorised alterations, or a even a tenant with a rental on a pending lease renewal before the major rent review next door.
For the asset manager, the pressure is on to make the most out of a potentially difficult situation. If you make wrong move, it could seriously affect returns and income streams.
That is why it is important for the asset manager to know the options available to him or her. The following guide is intended as a brief explanation of the principal tools in the property asset management ‘litigation tool-kit’.
The Section 25 notice
If you want possession of the unit, you will need to serve a Section 25 notice under the Landlord and Tenant Act 1954. This notice requires the landlord to give the tenant six to 12 months’ notice of a lease termination date. And within two months of the date of service, you will know whether or not your tenant wishes to stay.
Why serve a Section 25 notice? If the passing rent is lower than the market rent, it is worthwhile serving a Section 25 notice on your tenant only if you are sure that your tenant will want to renew and you do not want possession of the unit – you will receive no income stream at all if the tenant leaves on the termination date specified in the notice – unless, of course, you can relet it.
If you suspect they may serve a notice on you under Section 26 of the 1954 Act giving you a termination date chosen by the tenant, and you want to secure an income stream of at least 12 months at the passing rent, you will need to serve a Section 25 notice with a 12-month termination date before the Section 26 is served.
If you want to get possession of the unit, you will need to be in a position to prove one of the grounds under section 30(1) of the 1954 Act. The most common ground under section 30(1) of the 1954 Act is ground (f), redevelopment.
Can you oppose renewal on ground (f)? As an asset manager, you may be more interested in retaining the right to oppose renewal rather than actually carrying out the redevelopment work yourself – you will want to make sure your asset is an attractive purchase to a potential property developer. Even if you do not intend to carry out the works yourself, you are still be able to serve a hostile Section 25 notice on your tenant citing the redevelopment ground.
A note of caution, however:if a tenant leaves in response to a hostile Section 25 notice, he will be entitled to statutory compensation under section 37 of the 1954 Act, which is the equivalent of one times the rateable value of the property – twice the rateable value if the tenant has occupied for 14 years.
Also, the tenant should ask you for proof of your intention to redevelop. You will be exposed to paying their legal costs incurred as a result of your opposing renewal should your lack of intention continue and the question of whether you can establish the redevelopment ground is dealt with as a preliminary issue, so make sure you know where you are heading.
Continue to negotiate the new lease terms with the tenant in the meantime, or close that deal to sell to the property developer before the preliminary issue falls to be decided.
Section 146 notice
A Section 146 notice is a valuable tool for any breach of covenant, and can be used in various different contexts. For disrepairs, it is usually accompanied with an interim schedule of dilapidations.
You can serve a section 146 notice on your tenant for every breach of covenant other than non-payment of rent. It is usually the tenant’s obligation to pay for it as well – check the lease first.
If you discover that there has been an unlawful subletting or alteration, you must serve a Section 146 notice on your tenant to protect your position immediately. Whether you object to the subletting or not, the service of the Section 146 notice may perhaps put you in a better negotiating position with the tenant on its terms.
As everyone knows, there is a distinction between once-and-for-all breaches – for example, a tenant going insolvent – and continuing breaches such as disrepair. If you want to forfeit for a once-and-for-all breach, for example, if the tenant has unlawfully sublet the property at a rent lower than the prevailing market rent, then you must serve a Section 146 notice anyway, regardless of whether it is incapable of remedy.
Distress
Distress is another ancient remedy the courts would like to abolish. It remains lawful however, and is a very effective tool for landlords.
When is distress the preferred remedy? Imagine this scenario. You can sue, but the tenant will not pay. You can serve a statutory demand, but you do not want to wind up the company as you will get nothing, except perhaps a disclaimed lease in a liquidation. You do not want to forfeit the lease because you cannot re-let the unit and you do not want to pay empty rates. There are no guarantors or former tenants on the hook.
The only possible way of recovering anything for this quarter is to “distrain” on their goods, in effect to take possession of their goods, sell them, and set them off the rent due and owing.
How do you go about distraining on your tenant’s goods? One of the most important things either you or your managing agent should have access to is a certificated bailiff. The term “Certificated” means that your bailiff should have a certificate from the county court authorising him to execute distress on behalf of his clients.
You will then send your certificated bailiff a distress warrant, which entitles him to distrain on your behalf.
A reliable, certificated bailiff is important. They know what they can and cannot distrain upon, how to enter, when to enter and what to do when they enter. Their certificates can be removed by the county court, and last for two years only, so it is in their interests to give you a good service.
The goods you can distrain upon are movable goods on the premises: stock, and anything else not fixed to the property except goods delivered for the purposes of trade – this is not as wide an exception as it sounds.
Included also as distressed items are things in actual use, perishable goods, loose money, clothing, bedding, and/or tools of the trade.
Walking possession agreements are outside the ambit of this article, but you will find that many tenants accept these as an alternative to your bailiff walking out with their property.
The letter before action
The letter before action is normally enough to persuade a tenant to pay its rent or service charge. A claimant is obliged to inform the defendant before proceedings are issued anyway and give him an opportunity to pay the debt before involving the court.
Statutory demand
If there is no dispute, you should serve a statutory demand on your tenant. The statutory demand is actually the first step on the insolvency ladder. If it is your intention to wind up the tenant company, you are at liberty to issue your petition on expiry of 21 days.
If you think a liquidator would want to disclaim the lease, and you have a market ready and waiting, you should push the winding up petition through the Companies Court – this process usually takes 49 days – including serving your petition on the company, advertising and getting a return date from the court – and put the official receiver, which is the liquidator automatically appointed on winding up, or whichever other liquidator is appointed on election for disclaimer as soon as possible after the order is made.
One thing you should bear in mind, however. If you proceed to wind up your tenant company, you will not be ahead of the queue simply because you were the creditor that pushed the button.
Other remedies
Don’t forget Section 17, Landlord and Tenant (Covenants) Act 1995 notices, which enable you to obtain arrears of rent from outgoing assignors.
Also keep a check on your break notices – and any conditions attached to break notices which may not have been complied with by your tenant- rent review notices – the time periods for which will be set out in the lease – and any potential actions against guarantors.
Justin Michaelson is a solicitor advocate with SJ Berwin solicitors
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Applying for lease renewal |
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Previously, lease renewal applications remained with the court for years. Nowadays, courts take an active case management role in all the cases they handle, including lease renewals. Check that the 1954 Act timetable has been strictly complied with. If the tenant has made an error with the 1954 Act timetable, it will ordinarily be fatal from their point of view. This is because, since you are not constrained to the terms of their original lease, there is no more protection, meaning you can dictate terms in the knowledge that they want to stay. This will, of course, include their own, now rentalised, goodwill. Again, they may take their business elsewhere, though. Then there’s Part 36 offers. The Woolf reforms introduced the Part 36 offer, which for all intents and purposes codifies the rule from the case of Calderbank v Calderbank. Basically, if you want your tenant to pay £25 per sq ft, and he is holding out for £22.50 a sq ft, you can make a Part 36 Offer to the effect that £25 a sq ft should be the new rent under the lease. This puts pressure on the tenant because he realises that if he does not “beat” that figure, that is, get lower than £25 a sq ft at trial, it is exposed to the possibility of having to pay your legal costs from the date of the Part 36 Offer. A note of caution, however. If the tenant accepts your offer, you will be liable to pay their costs of the legal action to the date of your Part 36 Offer. It is doubtful whether Calderbank offers survive the Woolf Reforms for court procedures – they are still popular for out of court rent review procedures. Another tactic is to send the tenant a request for further information under CPR Part 18. If there is anything you want to know about their case, for example, why they claim they are entitled to a certain period, or why they believe they are entitled to a break clause in a new lease when there was not a break in the previous one, you should serve on them a request for further information. The requests should be directed to weeding out the reasons why they say they would be entitled to whatever it is they claim. This could be quite effective, because in the meantime you can continue to negotiate with them in the knowledge that they are in a sense being cross-examined by you on paper and being put under some internal pressure. If they refuse to answer the requests, you can apply to the court for an order requiring a response, and the costs of this application will ordinarily be met by the tenant. |
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Landlord’s right of re-entry |
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When a tenant does not pay its rent, the landlord is usually entitled to re-enter immediately – that is, the landlord is entitled to lock his tenant out and bring the lease to an end. Sometimes the lease does not expressly reserve the right to re-enter, so check before you change the locks. The problem with re-entry is that if anything goes wrong, and you wrongfully locked your tenant out, you are in for a rough ride. The courts do not like the right of re-entry and have recommended its abolition on many occasions. This means that a court is more likely than not to be against you from the start, so be wary. Are you safe to relet immediately after re-entry? When a tenant has not paid its rent, have one eye on what your managing agent is telling you about the available market for the property. Be sure to remember that the recently “disposed” tenant has a right to apply for relief from forfeiture for a period of six months from the date of re-entry and relief will normally be given on payment of the outstanding arrears. Theoretically, you will not be safe to relet the property for a period of six months, which, of course, means you will have to meet six months’ worth of rates. It is a value judgment on whether you should relet any earlier than this, but normally you will be able to tell when your tenant is in serious difficulty. If you are still within the six-month period, and you think the tenant may make it awkward for you, you should write to the tenant and inform them that you are intending to relet the property within the next 14 days and that if they do not apply for relief within that period you will assume that they consent to the property being relet. So long as you can prove that this letter was served and no response was received, the tenant will find it difficult to get a subsequent application for relief off the ground. How do you arrange for a re-entry? The act of re-entry could not be simpler. Your managing agents should appoint a reputable bailiff who will arrange for locksmiths to attend the property after trading/working hours. The agent will put up a sign explaining the forfeiture and give a number for any interested parties to call and the property cannot be accessed by the tenant the next morning. If gaining entry was difficult, and, for example, access to an outer part of the property was only possible, you will need to take legal advice on the extent of your re-entry, and whether that constituted a forfeiture, that is, whether your re-entry can be seen as a final and unequivocal act. |
