Increasingly residential developments now include a mixture of residential property in the form of houses and/or flats but also commercial units.  Whilst KDL Law is well known for its expertise within the residential leasehold sector, we also advise clients in terms of their ability to recover arrears due under commercial leases. 

Is there a difference to how a Landlord/RMC/Managing Agent should approach commercial, as opposed to residential, service charge arrears?

Rent and service charges due under commercial leases are not wrapped up in the same level of statutory protections afforded to leaseholders of residential properties. Such examples include that service charges do not need to be determined by a Court or Tribunal in advance of a landlord exercising its right to forfeit a commercial lease where the Tenant is in breach.   Additionally, and provided that the lease expressly says so, rent and service charges need not necessarily be formally demanded from the Tenant to enable action to be taken for the recovery of those charges or, if needs be, the forfeiture of the lease.  

Accordingly, the approach to their recovery is, indeed, very different albeit certain options apply to both forms of tenure.

This Legal Update looks at the most common options for Landlords seeking to recover rent and service charges due from their Tenants under a commercial lease. It does not, for example, address the intricacies involved with pursuing arrears from, former tenants and subtenants.   

Forfeiture of the lease

Forfeiture of the lease is often the Landlord’s most powerful weapon in securing payment from an errant commercial property Tenant. The act of forfeiture brings the lease to an end, subject to any successful application that may be made by the Tenant for relief i.e. that the Tenant agrees to pay all arrears and costs in order to keep and preserve the lease.

Provided that the Landlord has not waived its right to forfeit, by recognising the continued existence of the lease once the right to forfeit has arisen such as demanding sums due under the lease and/or accepting payments after the right has arisen, the lease can be forfeit in one of two ways:

1. Peaceable re-entry; or

2. Court proceedings.

Peaceable re-entry

Peaceable re-entry is generally undertaken by the Landlord changing the locks to the premises. In practice, re-entry will be affected at a time when the premises will be unoccupied i.e. very first thing in the morning or late at night when the Tenant is not trading.

It is advisable for the Landlord to instruct a bailiff experienced in this procedure (and with knowledge of the need to be careful, in the event that someone is unexpectedly at the premises when they attend) to take back possession, including changing the locks with the assistance of a lock smith and displaying a forfeiture notice at the premises.

However, whilst peaceable re-entry can be swift, it is a draconian measure. The Tenant will not be given any advanced warning and they will likely attend at the premises to open for business to find the locks changed.

Forfeiture by Court proceedings

Rather than physically re-entering the premises as set out above, the Landlord can issue and serve Court proceedings on the Tenant as an alternative - the lease is forfeit upon service of the papers on the Tenant.

There will be a period of time between the claim being served and a hearing to finally determine whether the forfeiture has been effective and to consider any application by the Tennant for relief from forfeiture for example on the basis that the Tenant has retrospectively paid all arrears costs and interest.  During this period, the Landlord will not be able to rely on the Tenant’s covenants in the lease in respect of their performance or enforcement but in contrast, the Landlord remains liable to perform their own covenants.

From the point of issuing the claim, The hearing of the claim will usually take place between 4 - 8 weeks after the claim is issued in the court (although Court time tables will differ across the country and London County Court are often slower). Should the Tenant file no, or no viable, defence to the claim, a possession order will likely be made at that first hearing.

Forfeiture by Court proceedings tends to be a “fairer” approach as it allows the Tenant some time to deal with the matter and the arrears without having to deal with the “shock factor” and significant disruption to their business that peaceable re-entry causes.  Arguably, it is the best rest where the tenant is likely to want to address the issue. It is also likely the better route in circumstances where there may be an element of dispute. 

Landlord considerations

There are a number of practical considerations for any Landlord to note before rushing into exercising the right of forfeiture. Whilst the following list is non-exhaustive, the Landlord should consider:-

•  whether the market rent is lower than the rent payable under the current lease and if so, it may be preferable to assist the Tenant to resolve the issue and thus remain in occupation paying that higher rent;

• if the Tenant is no longer able to trade, they may struggle even more to settle any outstanding arrears;

• is a new Tenant ready to take the premises, if not, can the Landlord take the risk of a void and liability for empty unit rates; and

• due to the Tenant’s right to apply for relief from forfeiture, the Landlord may not necessarily be able to re-let the premises for a period of at least 6-months.

Commercial Rent Arrears Recovery (“CRAR”)

CRAR is a 'self-help' remedy for the recovery of commercial rental arrears and does not require the involvement of the Courts. It is initiated by the Landlord's instruction to bailiffs to collect the rent or take control of the Tenant’s goods to the value of the arrears. The Court retains power to intervene if the Tenant applies for an order.

The process involves the Landlord’s bailiffs giving the Tenant 7-days’ notice that if the arrears aren’t paid, then the bailiffs will attend at the commercial premises to seize the Tenant’s goods within it. In practice, the bailiffs will attend at the premises following expiration of the notice and if payment is not made, then they may remove goods for sale at auction to clear the arrears.

Whilst CRAR can be an effective method of arrears recovery, it only allows the Landlord to recover “pure” rent and not any VAT and service charges, even if they are reserved as rent.

Also, if the Tenant does not have cash within the premises and the goods do not belong to them, because they are leased for instance, then CRAR will be largely ineffective.  Also, notice of the bailiff’s attendance can encourage the Tenant to remove any goods against which the bailiff might have enforced.

It should also be noted that exercising CRAR, will waive the Landlord’s right of forfeiture for the arrears being claimed.   

Money Judgment

The Landlord may issue a claim in the Court for a simple debt seeking a money judgment against the Tenant. Once obtained, the Landlord may enforce should it remain unpaid.

The process is slow and can be expensive, especially if the Tenant attempts to defend the claim. From issuing a letter seeking payment of the debt, to issuing proceedings, obtaining Judgment and enforcing, could take anything between 12-24 months, all the while the rent will likely continue not to be paid. 

Statutory demand

A statutory demand gives the Tenant 21 days to pay the sums claimed, failing which insolvency proceedings can be started to make them insolvent via way of bankruptcy if the Tenant is an individual or winding-up should the Tenant be a company.  The Tenant’s debt must exceed £750 if they are a company or, £5,000 if they are in individual before a statutory demand can be served.

If the Tenant does not pay following service of the Statutory Demand notice, the Landlord will need to consider whether or not to issue a bankruptcy or winding-up petition but note, if an order is made, it will not necessarily result in payment of the arrears, due to the insolvency position that such an order would make.

A cautionary note to Landlord’s however, if there is any hint of a dispute in respect of the arrears, it would be wise not to issue a statutory demand because it might be set-aside upon application by the Tenant setting out the dispute.  In such circumstances the Landlord is likely to be ordered to pay any costs incurred by the Tenant.

Withdraw from the rent deposit

Usually, when a Tenant takes up occupation of the premises the Tenant will also enter into a rent deposit deed, along with the lease.

Subject to the terms of the deed and the “triggering” events for when the Landlord can withdraw it, using a rent deposit to settle arrears is normally simple and results in an immediate release of cash. However, less money will then be available to cover any future liabilities under the lease should the Tenant fail to top up the deposit. Most deposit deeds require the Tenant to replenish the deposit if money is withdrawn and unless failure to do this gives the Landlord a right to forfeit, this route may not put the Tenant under any real pressure to comply with its lease obligations in the future. 

Guarantors

Many commercial landlords will require business tenants to provide a guarantor, usually an individual or another company with assets of value, prior to agreeing to lease the property to them.  Where a guarantor is in place the remedies of Court proceedings for a Money Judgment and Statutory Demand can be taken against the Guarantor as well as the Tenant themselves.

Before taking steps against a Guarantor it is imperative that the Landlord obtains advice on whether any liability under the guarantee has been triggered by the Tenant’s default.  There will often be strict criteria in the lease.

Conclusion

As can be seen, options are aplenty for a Landlord faced with the need to take steps for the recovery of commercial property rent or service charge arrears but it should be stressed, there is no “one size fits all” approach.  Accordingly, as soon as the Landlord is faced with an arrears position, and the Tenant appears unresponsive to demands for payment, the Landlord should take immediate legal advice so that they can understand what options they have and how they can preserve their rights of enforcement so that they can take the most robust action available. 

Disclaimer

This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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