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SEPTEMBER 2011

In the current uncertain economic climate, it is hardly surprising that landlords of commercial premises increasingly find themselves faced with defaulting tenants. But what are the best practical approaches a landlord can take to recover unpaid sums due under a commercial lease?

Faced with a tenant in arrears, a landlord has a number of options it can pursue to recover the money. In broad terms, a landlord may:

• Exercise the right of distress against the tenant’s goods
• Issue court proceedings for the amount outstanding
• Serve a statutory demand on the tenant 
• Seek to recover the outstanding monies from any guarantor
• Forfeit the lease

In this article we look at each option in turn.

Distress

Distress for rent is a remedy which enables a landlord to seize goods belonging to the tenant from the premises and sell them to recover any arrears of rent due. The goods can be seized by the landlord itself, but it is more common to employ a professional bailiff to do this on the landlord’s behalf. Distress is a popular self-help remedy due to the relative speed with which a landlord can recover outstanding arrears.

Distress is consistent with the continuation of the lease and cannot, therefore, be used in conjunction with forfeiture.

Distress will be abolished when Part 3 of the Tribunals, Courts and Enforcement Act 2007 comes into force. At the time of writing, the government plans to introduce these provisions in April 2012. At that time distress will be replaced by a new procedure for recovery of commercial rent arrears which will be similar to the current system. However, one controversial change will be that a landlord will have to serve notice before it seizes goods, something which it is not currently required to do. It is feared that many tenants will use this as an opportunity to dispose of goods which otherwise might have been seized. It remains to be seen how effectively the new procedure will operate in practice and how successful a replacement to distress it will be.

Issuing Court Proceedings for the Debt

A landlord can issue a debt claim for unpaid sums due under the lease. Such a claim will usually be pursued in the county court. A debt claim can be pursued whilst the lease is continuing, but may also be claimed: 

• as part of proceedings to forfeit the lease;
• or after the lease is forfeit.

A landlord needs to think carefully before issuing a claim. A tenant that is defaulting on payments under its lease is likely to have cash shortages and may have few (if any) valuable assets against which any judgment obtained can eventually be enforced. A landlord should make enquiries as to any assets that its tenant owns when debt proceedings are contemplated.

Service of a Statutory Demand

A statutory demand is a written notice in a prescribed form demanding payment of a debt. For a statutory demand to be served, a debtor must owe an undisputed debt of £750 or more to the creditor. If the debtor does not pay the debt in three weeks following service of the statutory demand, the debtor will be deemed insolvent and a bankruptcy or winding up petition (depending on whether the debtor is an individual or a company) may then be issued.

The threat of insolvency often prompts payment from defaulting tenants, whether individuals or companies. However, if payment is not made following service of a statutory demand, the decision to issue a bankruptcy or winding up petition should be considered very carefully as ultimately the bankruptcy or winding up of the tenant may be unwanted as it may bring the tenancy to an end, with the landlord only ranking as an unsecured creditor. A landlord may then only recover a fraction of the monies owed where the tenant has other creditors.

Pursue a Guarantor

The tenant’s obligations under the lease may be subject to a guarantee or indemnity from a third party. Usually a guarantor under a lease is liable to fulfil all of the tenant’s obligations under the lease (including the payment of rent and other sums) where the tenant is in default. 

The extent of any guarantee or indemnity very much depends on the specific wording of the guarantee or indemnity, and advice should be sought if a landlord is considering pursing this option to recover outstanding sums.

Furthermore, in some old leases it may be possible to pursue the previous tenant pursuant to privity of contract.

Forfeiture

Forfeiture means the termination of the lease. This is in some ways the ultimate sanction against a defaulting tenant. It can be used in conjunction with recovery of arrears by way of court proceedings or by way of statutory demand, but from the moment that a landlord validly exercises its right of forfeiture, the lease comes to an end and the future obligations of both parties under the lease are extinguished. However, obligations which have arisen before the date of forfeiture, such as to pay rent, are unaffected by the forfeiture.

In order to forfeit, the lease must contain an express right authorising the landlord to forfeit. A landlord may forfeit a lease in the following ways:

1. Peaceable re-entry. This is effected by entering the premises and changing the locks when there is no-one present, or by leaving a notice on the door which explains that the landlord has changed the locks and forfeited the lease by peaceable re-entry and that, from the date of entry, the lease is considered to be at an end.
2. Issuing court proceedings. Bringing court proceedings for possession is much more time-consuming and costly than peaceable re-entry, as substantial costs (including court fees) will be incurred by a landlord pursuing this option. The tenant may also seek to delay the process in order to remain in the property.

Peaceable re-entry is a self-help remedy as it does not usually require court action before it can be exercised. However, it cannot be used when individuals are actually in the property, and the landlord must not use any violence or intimidation to gain re-entry, as to do is a criminal offence.

For breaches other than non-payment of rent, a landlord must serve notice upon the tenant under section 146 of the Law of Property Act 1925 before it can forfeit. For this reason, it is common for leases to reserve other sums due from the tenant as rent, such as payment of service charge.

Which Method of Recovery Should I Use?

Choosing which method of recovery very much depends on the facts of each case, and on the specific wording of the lease. Advice should be sought at the earliest possible stage.

Particular care should be taken by a landlord that is considering forfeiting a lease. If the landlord does anything which treats the lease as continuing, it may lose the right to forfeit. This may be done, for example, by exercising the right of distress, or by demanding outstanding sums due from the tenant.

Craig Walker
Partner

If you would like any further information about the issues raised in this article please contact Craig Walker (cwalker@gdlaw.co.uk), or any other member of Goodman Derrick LLP’s dispute resolution team on 0207 040 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.