Given the current economic conditions many commercial tenants are facing real difficulty in meeting their rental obligations. As such Landlords are now more than ever having to consider what action should be taken, against whom and when.
This article aims to give a whistle stop guide as to what the options might be and some of the pros and cons that apply to each.
What is distress?
The landlord appoints a certified bailiff to take possession of the tenant's goods at the premises. The bailiff will hold the goods pending payment of the rent or if payment is not made the goods will be sold with the proceeds used to pay the rent. Alternatively it is often the case that a walking possession agreement will be entered into with the tenant. Distress was to be replaced by Commercial Rent Arrears Recovery ("CRAR") but as yet CRAR is not up and running.
When and how can distress be levied?
Once the tenant fails to pay its rent the landlord can immediately instruct the certified bailiff to proceed. No notice needs to be given to the tenant before the bailiff arrives.
What are the pros and cons of distress?
Distress looks like a cheap and effective means of recovering payment. The reality is that the law on distress is complex and as many of a modern day tenant's possessions are leased or in some way owned by third parties the process of distress can often create more problems than it solves. If the tenant is in administration or compulsory liquidation then the option to send in the bailiff is not available to the landlord. The same does not apply where the tenant is in voluntary liquidation.
What is a Section 6 Notice?
If a head tenant has sub tenants and the head tenant is not paying its landlord then the landlord is able to serve a Section 6 Notice on the sub tenants under the Law of Distress (Amendment) Act 1908. The sub tenants will then pay the head landlord all future rent until such time as the head tenant's rental arrears have been paid.
What happens when a Section 6 Notice has been served and when can it be served?
Once served if the sub tenant defaults the head landlord can take direct action against the sub tenant for recovery of any sums due. The Section 6 Notice can be served as soon as the head tenant fails to pay its rent in breach of its obligation to do so.
What are the pros and cons of a Section 6 Notice?
Service of a Section 6 Notice is a relatively cheap and easy way to potentially recover some form of rental income where a head tenant is in default of its obligation to pay rent. The Section 6 Notice will only relate to arrears owing at the time of service and so if further arrears become due from the head tenant then additional Section 6 Notices will need to be served. Of course if only part of the property has been sub-let the head landlord can only expect to receive a portion of the head tenant's rent. If the head tenant is in voluntary liquidation then the landlord's right to serve a Section 6 Notice is unaffected. However, if the head tenant is in administration or compulsory liquidation then the right to serve a Notice is potentially affected albeit the position is not entirely clear and so service of a Section 6 Notice may still be worthwhile.
What is a Statutory Demand?
A Statutory Demand is a demand to pay a debt in a specified form.
What does a Statutory Demand do and when can it be served?
Once a Statutory Demand has been served if the debtor does not pay within 21 days of service the creditor is able to issue a Winding-up Petition where the debtor is a limited company or a Bankruptcy Petition where the debtor is an individual. A Statutory demand can be served for any debt in excess of £750.00.
What are the pros and cons of a Statutory Demand?
A Statutory Demand is a relatively cheap means of seeking to recover monies owing and given the consequence to the company or individual of the demand going unpaid at the very least ensures that the debtor will apply its mind to the sums being claimed. The downside is that it provides the debtor with 21 days to make payment, or more likely to try and create some form of dispute in relation to the amount claimed which could potentially then convince the creditor to withdraw the Statutory Demand on the basis that the claim is disputed. Most debtors will know that if a debt is disputed the creditor will back off and so this is the achilles heel of the Statutory Demand process. If the tenant is in administration or liquidation then a Statutory Demand cannot be served.
What is a Winding-up Petition and what does it do?
An application for a winding-up Order will normally be made on the back of a Statutory Demand which has not led to payment being made. A company is wound up on the basis that it can not pay its debts as they fall due. Once a petition has been issued it is advertised in the London Gazette no sooner than 7 business days after the Petition is served, and no later than 7 business days before the hearing of the Petition. If the Court orders that the tenant is to be wound up then the Official Receiver will be appointed as the liquidator of the company.
When can a Winding-up Petition be issued and served?
If a tenant is unable to pay its rent as and when it is due then the landlord can present a winding up petition. There is no requirement to serve a Statutory Demand prior to the petition being presented but the majority of landlords will do so as a means of obtaining payment without actually having to proceed with the petition itself.
What are the pros and cons of a Winding-up Petition?
The threat of a winding-up petition will in most circumstances cause the tenant to concentrate firmly on the issue of the arrears. The tenant will know that the statutory advertisement can damage a company's reputation and impact on the ability to trade. It will also be aware that once a winding-up petition has been issued and served it cannot be put into administration except by order of the Court such that administration by filing a notice of appointment of administrators is rendered impossible. This would cause the tenant difficulties in terms of restructuring or a sale of the business. For the landlord the process is relatively expensive and at the very least involves Court fees of £880 although most of that fee is refunded insofar as the winding-up petition is withdrawn before the hearing actually is due to take place. Putting the tenant under may also simply lead to an empty building where the landlord then has to deal with security for the premises and take on the liability for rates over and above the obvious issue as to rental void.
What is forfeiture and what does it do?
Ordinarily a lease will contain a forfeiture clause which entitles the landlord to take possession of the premises typically where the tenant has failed to pay its rent in breach of its obligation to do so. Forfeiture brings the lease to an end and ordinarily the landlord can do this either by peaceable re-entry, i.e. by taking physical possession of the premises, or by the issue and service of proceedings against the tenant claiming possession of the premises.
When can the landlord seek to forfeit the lease?
The landlord can forfeit as soon as the forfeiture clause within the lease says that the landlord is able to do so. In terms of the obligation to pay rent this might be 14 or 21 days after the failure to pay in accordance with the terms of the lease. Ordinarily the other main route to forfeiture is where the tenant has entered into some form of insolvency procedure.
What are the pros and cons for forfeiture?
The right to forfeiture and when that right has been waived and lost is complex and so will ordinarily lead to the landlord seeking advice before taking such action. As forfeiture ends the lease the liabilities created by the lease or as a result of the lease are brought to an end and these liabilities will include those of a guarantor or earlier tenant as well as the tenant itself. As such careful thought needs to be given to whether that is the desired objective given the current market conditions. Where the tenant is in administration the landlord cannot forfeit the lease by issuing and serving proceedings or by peaceable re-entry unless the administrators agree or the Court gives permission. Where the tenant is in compulsory liquidation the landlord cannot forfeit by issuing and serving proceedings, and it is not entirely clear whether it would be entitled to forfeit by peaceable re-entry. Where the tenant is in voluntary liquidation the right to forfeit is unaffected.
What are Court Proceedings?
Most landlords that take this option will probably answer the question with one word: frustrating. Basically proceedings are issued and served and the matter then runs through the court process until the matter is resolved by way of default judgement, trial or settlement.
When can the landlord issue Court Proceedings?
As soon as the monies are due and owing the landlord can issue proceedings. Ordinarily a pre-action letter will be required and if this is ignored and a landlord goes straight to issuing proceedings costs consequences may apply.
What are the pros and cons of Court Proceedings?
Issuing Court proceedings is potentially the most time consuming and costly option for a landlord to take when pursuing a tenant. Any tenant will know that it can delay the court process through stealthy use of procedure and offers to settle or to mediate in so far as the litigation is stayed or the court timetable deferred. This can be done to buy time and without any good faith on the tenant's part. Used properly proceedings can lead to results being obtained but the threat and issue of proceedings will have less of an immediate impact than the threat and service of a statutory demand and winding up petition.
When might it be possible to pursue Former Tenants and Guarantors?
There are exceptions, which are beyond the scope of this article, but in general in so far as the existing tenant is in some form of insolvency this may not impact upon the landlord's ability to seek payment from any former tenant or guarantor.
When can the landlord pursue Former Tenants and Guarantors?
Once the existing tenant is in default then at that stage the landlord needs to establish whether there are any former tenants or guarantors liable either under an AGA in relation to a post 1 January 1996 lease or as a former tenant or guarantor under the terms of an "old lease" (for the purposes of the Landlord and Tenant (Covenants) Act 1995. The law is complex and so if there are such parties checks must be undertaken to ensure that they still remain liable. If there is a former tenant or guarantor who remains liable then in broad terms a section 17 notice or notices will need to be served, under the Landlord and Tenant (Covenants) Act 1995, to preserve the landlord's right to recover the monies. Such notice or notices must be served within 6 months of the liability to pay arising. As long as the section 17 notice or notices have been served properly, in certain circumstances further notices will need to be served to supplement the original notices, if payment is not made then the landlord will need to consider how next to pursue its claim and when doing so will consider options such as a statutory demand, winding up or court proceedings.
What are the pros and cons of pursuing Former Tenants and Guarantors?
Obviously having more than one target for recovery is a benefit to the landlord but these rights can be easily lost if the correct process is not gone through. In addition more targets means more cost and quite often the original tenant or guarantor may no longer exist or if they do will seek to dispute liability hence delaying recovering. In so far as a former tenant or guarantor does pay on service of a section 17 notice then the former tenant or guarantor is entitled to an overriding lease. This is only an issue in so far as the landlord does not want that former tenant or guarantor to be able to take such a lease. In this market it is unlikely that landlords could afford to be that choosy.
What is a Rent Deposit?
The rent deposit is a sum of money paid by the tenant at the outset of a lease and its purpose is to protect the landlord against rent default or breach by the tenant of other tenant obligations in the lease.
When might it be possible to draw down from the Rent Deposit?
Subject potentially to certain issues as regards CVA's and IVA's a well drafted rent deposit deed will allow the landlord to drawdown irrespective of the tenant being subject to any of the various insolvency procedures.
What are the pros and cons of seeking to draw down from a Rent Deposit?
Again the rent deposit will provide the landlord with another means of recovery. However the key to being able to draw down is whether the deed has been well drafted from a landlord's perspective. If not then this can give rise to difficulties. Otherwise the only other issue will be whether there are any particular circumstances that arise from any insolvency of the tenant which impact upon the landlord's ability to claim the money.
In the current market place landlords have to be more creative in terms of how and from whom they recover rental arrears and other unpaid tenant liabilities. Landlords will now probably want to avoid having an empty property and so the usual threat of forfeiture is an empty one.
There are ways and means of recovering rent. Some are cheaper and are based on how the tenant will react to a sharp jolt through distress or a winding up petition and some involve more detailed consideration as to pursuing former tenants and guarantors.
The one aspect that is probably more certain than any other is that unless you think a given tenant or guarantor has the means to pay they are probably not worth pursuing. It's a fundamental consideration but one that often seems to escape close consideration when a recovery strategy is being put together.
Disclaimer - This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. This article is intended only to highlight general issues or changes in the law which might be of interest to our clients and contacts.
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