Dealing with Problem Commercial Tenants

Posted: Friday, 24 August 2012 @ 15:59
Dealing with Problem Commercial Tenants

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In hard economic times commercial landlords are often fighting a day to day battle to recover rent and enforce lease covenants. So here is a resume of the available options.

Rent and Service Charges

1. Distraint: the first and most used remedy is to distrain for rent. This can also apply to service charges if they are reserved as rent in the lease. Distraint is an ancient remedy which was about to be confined to the history books, but it lives on due to a change of mind on introducing a new procedure for commercial rent recovery.

A bailiff is employed to visit the premises and levy against the tenant’s goods found there. The Bailiff makes a list of the goods and gives the tenant time to pay the outstanding arrears and Bailiff’s charges, and if he fails to do so the Bailiff may seize them and sell them. Distraint can only be exercised at the leased premises.

Whether it is worth pursuing this remedy will depend on the forced sale value of the tenant’s goods. And anything which the tenant has on lease or hire purchase will be exempt from sale.

If the tenant is in compulsory liquidation or subject to a company voluntary arrangement, distraint can only be exercised with the leave of the court. If the tenant is an individual and is bankrupt, distraint can only be exercised for arrears in the 6 months prior to bankruptcy.

You should also note that if you elect to distrain on goods you will have waived your right to forfeit the lease for the rent accrued at that time and for any other breaches of which you were aware. 

2. Rent deposit: check whether you have security funds to cover arrears. Also check the terms because if you use the deposit you may need to demand a top up.

3. Rent action: at any time during the term of the lease or after it has expired, it may be possible to pursue a simple rent action through the courts for the recovery of rent arrears, and, on judgement, use the enforcement processes available.

4. Guarantors: if anyone guaranteed the performance of the tenant’s covenants in the lease, you may be able to make a claim against them.

5. Action against sub-tenants: under the Law of Distress (Amendment) Act 1908 a superior landlord can serve a notice in the sub-tenant detailing the arrears of rent due for the tenant and requiring all future rent payment to be made directly to the superior landlord. If the sub-tenant failed to pay future rent than you can distrain against that sub-tenant’s goods.

6. Action against original tenant: if the lease was granted after 1 January 1996, then the original tenant will no longer be liable on assignment to a new tenant, unless he entered into an Authorised Guarantee Agreement. If he did he will be entitled to ask for an overriding lease.

7. Statutory Demand: this is an insolvency process, not a remedy in itself. It is sometimes used to put pressure on a tenant for fear of either being would up or made bankrupt. The statutory notice is served giving 21 days for compliance. In default insolvency proceedings may be pursued. The usefulness of this process depends upon the tenant’s circumstances. If the situation is that hopeless it may be better to simply follow the forfeiture procedure and obtain possession, before considering any further insolvency action.

8. Forfeiture: this is the nuclear option. Once forfeiture has been completed the lease is at an end.

You must be very careful not to take any action which might be construed as acknowledging the lease, as this would waive your right to forfeit.

Also remember that taking peaceable possession or applying to the court automatically brings the lease to an end, so any subsequent agreement with the tenant will amount to the granting of a new lease. Any agreement should therefore be subject to a court order granting relief.

It may be possible to simply gain access to the premises, change the locks, and put up a dated notice confirming that peaceable possession has been taken, with contact details of the landlord or his agents. But beware. Firstly, if the premises are let with accommodation, it is unlawful to gain peaceable possession. And secondly note that it is a criminal offence to use or threaten violence to secure entry, if there is someone on the premises who is resisting entry.

Whichever method of forfeiture is used, note that you must preserve and make available for the tenant his goods left on the premises at the time of forfeiture. You will be a bailee and will have duties to the tenant to take reasonable steps to protect those goods. As you have elected to forfeiture you will have no right to distrain on the goods.

If peaceable re-entry is not possible, then forfeiture must be pursued through the courts. First of all it would be wise to serve a formal demand for payment. The lease may provide for such a demand to be made after a certain time period from the default. Check the terms.

The tenant and others such as guarantors or mortgagees may have a right to relief from forfeiture on payment of all arrears, interest and costs. They will have to apply to the court for that relief. But if the landlord has already gained physical possession under a court order it will be too late to apply for relief.

If possession was obtained peaceably, or the court proceedings for possession are still continuing, the court has a discretion whether to grant the relief.

Breach of covenants other than payment of rent

Here the landlord’s remedies are more limited. As above it may be possible to pursue a guarantor or original tenant. As for the tenant, court action is always available to claim damages for breach of covenant, such as the failure to repair.

With repairs (dilapidations) there is a cap on damages, as the landlord cannot recover more than the diminution loss caused by the breach, which is often much less than the repair cost.

Ultimately the landlord may decide to go for forfeiture of the lease. The landlord must not have taken any action subsequent to him becoming aware of the breach which could be construed as acknowledging the lease, as this will amount as a waiver of the right to forfeit. So, for example, demanding rent knowing that the tenant has broken a lease covenant would amount to a waiver

If the landlord wishes to go the forfeiture route he must first serve the tenant with a statutory notice under section 146 of the Law of Property Act 1925. He must specify the breaches, what is required to remedy them (if they are capable of remedy), and demand compensation in money for the breach. He must give a reasonable time for compliance. Only then, if the tenant either fails to comply, or the breach is a once and for all breach not capable of remedy, may the landlord issue forfeiture proceedings.

Again the tenant and other interested parties such as mortgagees or guarantors may apply for relief from forfeiture, and again the court has discretion whether to grant relief and if so, on what terms.

Conclusion

At the first sign of trouble it is best to take early advice from an expert who will help you understand the options and the best way to proceed in the particular circumstances.

Nigel Musgrove
Business and Litigation Solicitor

Tel: 0845 003 5639



Blog by Nigel Musgrove
Nigel has been providing dispute resolution advice as a solicitor for over 35 years. As well as advising SMEs and business owners on disputes he also offers a specialist licensing law service. View profile
Call Nigel on +44 (0)1285 847 001 or by email
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.

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Thank you. Your response is great, very straight to the point! Hopefully this will bring an end to the matter. I will certainly be recommending your services as I am very impressed with the prompt dealing of this matter.
Janet Burbidge

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