In a commercial context, a landlord’s main aims are to ensure consistent rent payment of sums due under the lease. Where that is not the case, landlords will want to rectify matters as soon as possible. Considerations for deciding which method to adopt include:
1. If the arrears are an isolated incident;
2. Whether to maintain an ongoing relationship;
3. The cost outcome to be achieved;
4. Whether to take possession of the property;
5. A tenant’s financial ability; and,
6. Any other breaches of the lease.
Forfeiture of the lease
The landlord may seek to determine the lease in respect of a breach; the lease ends if the landlord forfeits on the lease. The landlord must comply with any provisions for forfeiture contained in the lease. Forfeiture will not recover any rent payment arrears and an additional method must be adopted. If a landlord intends to forfeit, the landlord must be careful not to waive the right by unequivocally acknowledging the existence of the lease, such as acceptance of rent in arrears.
Commercial Rent Arrears Recovery (“CRAR”) Scheme
The CRAR Scheme under the Tribunals, Courts and Enforcement Act 2007 has replaced the law of distress and offers a commercial enforcement method for recovering arrears (only applicable to commercial leases). An enforcement agent is instructed to seize control of the tenant’s goods to clear off the arrears. The landlord can only recover payment for rent due for “possession and use of the demised premises” (including interest & VAT); and will not be able to recover any other sums due, even if they are defined in the lease as reserved as rent.
If the arrears are due to an isolated incident, a landlord may decide to enter into a payment agreement to clear off the arrears in due course; if the agreement is drafted carefully, it will not compromise any other method of recovery.
Recovery from Sub-tenant
The landlord may require a sub-tenant to pay rent owed to the tenant direct to the landlord.
Recovery from the Guarantor
Subject to the provisions of a lease and if a guarantee is given by a guarantor, a landlord can recover sums due from a guarantor.
Recovery from the rent deposit
If a tenant has agreed to provide a rent deposit deed, correct notice needs to be served to allow withdrawal and to request a top up.
A statutory demand can be used as a preliminary step to issuing a petition for bankruptcy or winding-up. A statutory demand can only be served where the tenant is a company and £750 in debt or where the tenant is an individual £5,000 in debt. Under a statutory demand the tenant has 21 days to settle the arrears, after 21 days have lapsed, a landlord is able to petition for bankruptcy or liquidation under the Insolvency Act 1986.
Court proceedings should be used as a last resort. Procedurally, a landlord should send a letter before action in compliance with the Pre-Action Protocol for Debt Claims followed by service of court proceedings. As the tenant should be aware of the arrears, a relatively short time should be provided to respond to the letter before action.
Landlords have an array of tools at their disposal for recovering arrears, but need to consider carefully their chosen method to ensure they achieve their desired outcome, whether that is possession of the property, payment or maintaining a working relationship.