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A Guide To Recovering Commercial Rent Arrears

Commercial Landlords – Before you do anything, consider:

  • Whether to take possession, or ‘forfeit’ the lease for non-payment – if you demand or accept rent you lose this right, so think about it first.
  • Whether the tenant is in any form of insolvency and, if so, what does this mean?
  • How old is the debt? If it is over 6 years then you’ll be too late.

Court Proceedings

Does the Pre-Action Debt Protocol apply? It does where any business is claiming payment of a debt from an individual (and this includes a sole trader).

It sets out various steps that you have to take, and certain information that you have to put in your letter of claim. It aims to encourage early communication and exchange of information to help clarify any issues in dispute, to enable the parties to resolve the dispute without the need for proceedings and, where proceedings cannot be avoided, to assist with the efficient management of the claim. If proceedings are issued, the court will expect you to have followed it, and will look at non-compliance when making directions for the claim.

In all other cases the you have to follow the Practice Direction Pre-Action Conduct and Protocols.

Court action can be more costly, and take longer, than some other forms. If however there is a substantial dispute it may well be the right route to take. If you start, but then stop a case you may have to pay the defendant tenant’s costs.

You have to serve a letter before action demanding payment within a certain number of days and will likely be penalised in costs by the court if you do not do this.

You can then issue a claim form and particulars of claim on the tenant who then has either 14 or 28 days to serve a defence, depending whether an acknowledgment of service is filed or not. Without a defence you can ask for judgment in default, which is most often dealt with on paper without a hearing. If a defence is put in but the case is simple you can apply for judgment. That hearing should take place within a few months.

If you get a defence that is not frivolous, decide not to ask for one of these types of judgment (or do and fail) then the court will give directions setting out the steps to take to exchange evidence and prepare for trial. This usually happens where there is a defence and or counterclaim from the tenant. Consider BEFORE issuing whether there is a potential counterclaim.

Once judgment is obtained a landlord then has to take steps and incur further costs to enforce the judgment. If the tenant has no funds, income or assets to enforce against, there is little point in obtaining a judgment. Good practice before issuing proceedings is to take steps to view the financial standing of the potential defendant. There is no point suing a defendant who will never pay you.

Using A Rent Deposit

You can, if you follow the notice requirements, take the rent deposit. Check:

  • Should you keep this to protect against other, more awkward liabilities in the future, like damages for dilapidations
  • That the paperwork allows you to deduct what you are thinking you might deduct!

This is usually a simple process, but you do dwindle the fund for the future unless you can get the tenant to top it back up, as the modern Wilson Browne Solicitors deposit deeds that the commercial property team prepare do. Does the deed have a penalty clause if the tenant does not top it up? Forfeiture is the remedy you want in there at the outset (otherwise what is the point?)!

Statutory Demands

Often (over) used as a quick debt recovery tool they can frighten a debtor into paying up. It puts pressure on a tenant by raising the real possibility of bankruptcy (in the case of an individual) or liquidation (in the case of a company).

You can serve a statutory demand if the debtor owes at least £750 (company) or £5,000 (individual) AND the debt is crystalised and undisputed. If a landlord serves a statutory demand that does not meet these requirements they should expect the tenant to apply for the statutory demand to be set aside and recover its costs of doing so.

Again, it is worth considering any potential counterclaim, since this could also lead to the demand being set aside.

 After service the debtor has 21 days in which to pay. After that you can present a bankruptcy or winding-up petition to the court. You have to think really carefully about doing this because this is when it gets expensive. I the tenant good for it? You will only be an unsecured creditor in any bankruptcy or liquidation. Usually you get back very little, so is there another commercial imperative that you help by winding them up or making them bankrupt?

Trustees in bankruptcy and liquidators are entitled to step away from, or “disclaim” onerous property, which is a definition that includes leases. If that happens then the obligations under the lease end. It is doubtful that there would be much left to pay the landlord at the end.

Previous Tenants?

Can you look backwards up the chain? What about former tenants (or their guarantors)?

If the lease pre-dates 1 January 1996, you can go to:

  • Current tenant
  • First tenant
  • a former tenant who has given a promise (“direct covenant”) to be liable
  • any guarantors of any of the above

For those leases dated 1 January 1996 or after, you can go to

  • Current tenant
  • Any one who assigned (or guaranteed) under an authorised guaranteed agreement (AGA) with the current tenant
  • a prior tenant who assigned under an excluded agreement

There are very tricky notice periods and steps to be taken to preserve your rights here. You must serve a particular notice within six months after the due date to comply with s17 of the Landlord and Tenant (Covenants) Act 1995.

Interest On Late Payment Of Rent

If you are chasing rent from a commercial Tenant then the Late Payment of Commercial Debts (Interest) Act 1998 (LPCD(I)A 1998) creates rights for businesses (also public sector organisations) to claim interest for late payment and also to recover reasonable debt recovery costs when each party is acting in the course of business. You can also use it to challenge certain commercial payment terms if the remedy for late payment in the contract is not harsh enough. You will have to get over a few hurdles to argue that the rent is due in return for a ‘contract for the supply of services’, and there are some other steps too, but it is worth bearing in mind if you do not have proper interest clauses in your lease.

Commercial Rent Arrears Recovery - Tenant

The previous regime of the common law remedy of distress for arrears of rent was replaced by the Commercial Rent Arrears Recovery (CRAR ) scheme on 6 April 2014. CRAR is a ‘self help’ remedy and does not need the court to be involved very much. As Landlord you instruct ‘enforcement agents’ (formerly bailiffs) to collect the rent or take control of goods.

CRAR DOES NOT apply to mixed use or residential premises. It is only is available only to landlords of leases of commercial premises.

“Rent” has a narrow definition and only payments for ‘possession and use of the demised premises’ (including any interest and VAT on that amount) can be claimed, not others e.g. rates, council tax and service charges even if they are treated “as rent” in the lease.

The rent must be overdue by a minimum of 7 days worth of rent, be due and payable before the notice is given, and constant checking of the calculation (because you can get installments or other recoveries) is needed.

Typically the process involves one of:

  • a controlled goods agreement (formerly ‘walking possession’)
  • securing goods on the premises or on a public highway, or
  • removal from the premises

Notice must be served first, unless the Court’s permission has been obtained, which may happen if there is a risk the goods will be disposed of. The enforcement agent may use reasonable force to enter and re-enter the premises.

Commercial Rent Arrears Recovery – Sub-Tenants

The landlord can also use this act to force a subtenant to pay directly to the landlord rather than to the defaulting tenant. Be careful that you don’t want to forfeit the sub-lease though!

You can only have one notice under the scheme at any one time, but you can withdraw and serve another one on another tenant or sub-tenant.