November 30, 2020
Please note that at the time of writing emergency legislation is currently in place due to COVID-19 meaning that protection from forfeiture is in place until at least 31 March 2021.
If you’re a commercial Landlord faced with a tenant who is in arrears of rent, you may be questioning what action you are able to take to recover the rent or cut your losses.
There are a number of possible remedies available when a tenant is in rent arrears but the most appropriate option will often come down to a commercial decision based on how easy it will be to recover the rent, and the risk you may find yourself with an empty property on which you may have to pay business rates. Forfeiture in a depressed economic climate is rarely beneficial to the Landlord unless you wish to have the property back for some reason, perhaps as an opportunity to redevelop and it is important to remember that once forfeited, a lease cannot be reinstated.
The usual steps to terminate a commercial tenancy are as follows:
- Ordinarily (when the COVID-19 regulations are not in place) a Landlord has a right to forfeiture/re-entry of the premises if rent has not been paid within 14 of 21 days’ (depending on the terms of the lease) of its due date provided that the lease gives the Landlord the right to forfeit in these circumstances. Landlords need to be aware that they should formally demand the rent but that they may lose the right to forfeit the lease if they have accepted partial payment of rent. Please seek advice at an early stage to avoid waiving your right forfeit.
- You may forfeit the lease either by peaceable re-entry (changing the locks) of the property (usually by employing the services of a bailiff) or by going to court to bring forfeiture proceedings. Applying through the courts costs money and time and if you are unlikely to recover the rent following the forfeiture, peaceable re-entry through a bailiff may be more appropriate. You will not be able to recover any rent from the tenant for the period after forfeiture. Please seek advice before taking this step to ensure that you do not become liable for wrongful forfeiture and damages.
- You may wish to provide the tenant with an opportunity to pay by serving a notice under Section 146 of the Law of Property Act 1925. A Section 146 notice must be served for any other breach of the tenants’ covenants and failure to comply by the tenant entitles the Landlord to forfeit the lease. This is a complex area and you should seek specific advice before taking action.
- The tenant then has up to 6 months to apply for relief from forfeiture through the courts but, if relief is to be applied for, you will stand a better chance of success the sooner you apply provided you have grounds to do so. Please seek advice immediately if your lease is forfeited.
Alternatives to forfeiting the lease:
- Usually the first port of call is to try and agree a payment schedule with the tenant. Particularly during times like these where businesses are often not operating at all/to their usual capacity and your tenant would usually pay the rent without any problems, the tenant may just require a temporary pause or reduction in rent or an agreement as to how the arrears can be paid over a period of time. This approach will usually maintain a good Landlord-Tenant relationship and help ensure that you still have a Tenant in place once the storm has been weathered but may prejudice your right to forfeit.
- Draw down on rent deposit- When entering into a lease it is advisable to negotiate a rent deposit from the tenant (usually of around 1- 3 months’ worth of rent). When arrears arise you can withdraw sums from the rent deposit to cover these and can require the tenant to top up the rent deposit. This will usually waive your right to forfeit so, if the deposit is insufficient to cover the arrears and you with to forfeit the lease in any event, you should forfeit first before utilising the rent deposit to pay arrears.
- If there was a Guarantor to the lease, the terms of the lease should allow you to pursue them for the unpaid sums. Forfeiting the lease would release the Guarantor from these obligations. You should therefore consider action against the guarantor first.
- Commercial Rent Arrears Recovery (CRAR)- this allows you to instruct an enforcement agent/bailiff to take control of the tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. The enforcement agent must serve various notices on the tenant at each stage of the process. Under the current COVID-19 legislation, the minimum amount of rent that must be outstanding before commercial rent arrears recovery can take place is an amount equivalent to 189 days’ rent and this may increase if the provisions are extended.
- Statutory demand and insolvency proceedings- if the amount of debt is not disputed the rent arrears can be deemed evidence of an inability to pay the tenant’s debts and gives grounds to present a bankruptcy or winding up petition. Simply threatening insolvency proceedings is often enough to produce payment. If there is any dispute as to the amount of debt, you could be liable for significant costs however and forcing a company into insolvency where they might have survived given time may reduce your chance of recovering the debt in full. If the rent is payable by an individual, a statutory demand often produces a positive response as it places at risk all assets held by that individual.
- Consider accepting a surrender of the lease if the tenant really cannot pay the rent and has no possibility of recovering their position. This may provide an opportunity to let your property to a more reliable tenant.
Wallace Robinson & Morgan Limited are based in Solihull & Dorridge and serve clients across Birmingham and the West Midlands, Warwickshire, Worcestershire and further afield. Our team of Company and Commercial Lawyers are happy to help if you would like advice about forfeiture or other remedies to recover rent arrears
If you would like to discuss your matter, please call 0121 705 7571 and ask to speak to a member of the Company and Commercial law team or email us at firstname.lastname@example.org .
This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.