How can we help?

What are the options for commercial landlords when a tenant defaults? Joe Reeves explains from the commercial litigation team sets out the choices.

Before deciding on how to proceed, landlords should think about what they want to achieve, including whether they want to maintain the landlord/tenant relationship, as well as the costs and consequences of the various options.

Forfeiture

If a tenant fails to pay rent due, most commercial leases will provide a right for the landlord to re-enter the property, change the locks and terminate the lease. This is known as forfeiture and enables the landlord to recover possession of the property.

This course of action may be attractive to a landlord who has a tenant with a history of rental default or one whom the landlord believes will not fulfil its future obligations. If the rental market is strong, the landlord may be confident that it will be able to quickly engage a new tenant, possibly at a higher rent. In that instance, forfeiture may be an economically attractive option. Conversely, if the market is poor and the property may be vacant for some time, the landlord may wish to keep the tenant and pursue other options for the recovery of rent, particularly to avoid having to pick up the bill for rates whilst the property remains vacant.

It should be remembered that if forfeiture is exercised, the tenant will have the right to apply to the Court for relief from forfeiture, which it may be able to obtain if it settles the rent arrears. An award of relief entitles the tenant to take back possession of the property. If the landlord has subsequently re-let the property to another tenant, it may find itself the subject of a claim by the tenant for damages. Furthermore, by exercising the right to forfeit, the landlord may waive other remedies it may have otherwise had under the lease.

The law of forfeiture is technical and legal advice should be sought if you are thinking about exercising this option.

Rent Deposit Drawdown

If the tenant paid a rent deposit at the time the lease was granted, the landlord may be able to utilise the deposit to cover any rent arrears. The ability to do this will depend upon the terms of any Rent Deposit Deed, which will determine whether there are any limitations on this option. This course of action may be appropriate where the tenant default is an isolated incident and the Rent Deposit Deed requires the tenant to top up its deposit. If there is a history of persistent default, other options for recovery may be more appropriate.

Commercial Rent Arrears Recovery (CRAR)

CRAR came into force on 06 April 2014 replacing the historic remedy of distress and allows the landlord to instruct an enforcement agent to take control of the tenant’s goods and sell them to recover the debt.   It may only be used for commercial tenancies (as opposed to mixed use tenancies) and only in respect of principal rent. It cannot therefore be used to recover service charges, insurance rent, or other sums due under the lease. The process is complex and various notices must be served on the tenant (and any sub-tenant) throughout the process.

Court proceedings

If you do not wish to forfeit the lease, you may decide to instigate Court proceedings to recover the rent arrears and any other sums due.   Such action can take several months however and is of little use where the tenant cannot afford to pay the rent and subsequently defaults on later payments.   In this instance, a Statutory Demand (see below) may be more effective.   However, a solicitors’ letter before action and the threat of proceedings will often prompt the tenant into payment or at least seeking to arrange a payment schedule in respect of any arrears.

Statutory Demand and Insolvency

This method may be appropriate where there is no dispute as to the debt. A Statutory Demand may be served on the tenant and if payment is not made within 21 days, the landlord may be entitled to present a bankruptcy or winding up petition. There are limitations to this course of action and it may not necessarily be effective in recovering the debt. Often, however, the mere threat of insolvency can be highly effective in obtaining payment from the tenant.

Pursuing a guarantor or former tenant

If there is a guarantor under the lease, then it is likely that there will be a provision that obliges the guarantor to pay any sums due in the event of tenant default. If so, the landlord will be able to pursue the guarantor. Equally, if a former tenant has guaranteed the obligations of the current tenant including the obligation to pay rent, the landlord will be able to pursue the former tenant for any sums due.   The availability of these remedies will depend upon what is provided for in the lease and so the lease will need to be carefully reviewed before any action is taken.

Payment Agreement

This may be an appropriate remedy where the landlord is keen to preserve the landlord/tenant relationship and is of the view that the tenant default is just a temporary problem. A Payment Agreement will provide for payment of the arrears in instalments and should include a provision to terminate the agreement if the tenant defaults.   If an agreement is entered into, it will likely compromise the landlord’s ability to pursue any other remedies, provided the tenant complies with the terms.