Non-payment of Rent - Navigating Tenant & Landlord Rights

For over two years, commercial landlords have been prevented from using their traditional legal remedies against tenants who fell behind with rent payments.

This was the result of swiftly enacted legislative measures taken by the government at the start of the COVID-19 pandemic, designed to give tenants breathing space and keep their businesses going.

There remains some lasting protection for tenants with unpaid rent which will fall within the remit of the new Commercial Rent (Coronavirus) Act 2022, which is currently awaiting Royal Assent. For some tenants, and for prescribed periods, “protected rent” under the Act can be referred to arbitration under a new scheme and does not trigger the usual landlord remedies. Otherwise, landlords are back in business with their complete armoury of remedies restored. 

This article is intended to serve as a reminder of a landlord’s remedies for tenants' breaches, and of some of the strategic considerations that might lead a landlord to use one remedy over another.  The first factor is to establish whether the breach of lease is the non-payment of rent or non-observance of another covenant in the lease.

Non-Payment of Rent

AT A GLANCE:

Forfeiture

Commercial Rent Arrears Recovery (CRAR)

Rent Deposit

Guarantor

Court Proceedings

Subtenant Diversion Notice

Statutory Demand

 

Forfeiture

Arguably the most draconian of remedies, forfeiture brings the lease to an early end. As such, it is only valuable if the landlord wants that outcome and can readily find a replacement tenant. A forfeiture clause in the lease will normally state a grace period for payment of rent arrears (usually 14 or 21 days) after which a landlord may exercise its right to forfeit the lease if the arrears remain unpaid. The landlord is not required to serve any notice on the tenant, and the landlord can either apply to Court for forfeiture, or more commonly, simply forfeit by peaceable re-entry – effectively changing the locks while there is nobody at the premises (the latter is important to avoid a criminal offence being committed by the landlord). If a landlord wants to proceed this way, it is preferable to avoid delay once the right to forfeit arises because of the risk of waiver of the right to forfeit. This waiver can occur if the landlord recognises the ongoing relationship of landlord/tenant so electing to keep the lease in tact. Following forfeiture, the landlord will need to comply with the Torts (Interference with Goods) Act 1977 to return the tenant’s chattels left at the premises. While a forfeiture cannot be “revoked”, an evicted tenant can apply to Court for relief from forfeiture which it is likely to get if all arrears, interest, and costs are paid.

Commercial Rent Arrears Recovery (CRAR)

This method of enforcement allows a landlord to instruct a court-certified enforcement agent to seize and sell tenant’s goods in order to recover the value of rent arrears – it is the statutory replacement for the historic remedy of distress.  A key consideration is the presence of any valuable chattels and goods in the tenant’s premises and the ease of sale. CRAR applies to all commercial leases but the tenant must be given at least 7 clear days’ notice, under The Taking Control of Goods Regulations 2013, before this remedy can be exercised – of course, this gives the tenant the opportunity to remove any vulnerable items and take the sting out of the remedy. Crucially, CRAR can be used to recover arrears of principal rent only (i.e. not service charges, insurance rent, and other sums reserved as rent under the lease) which, depending on the circumstances, can prove rather limiting. Another downside of this remedy is that it could well be counter-productive to seize those items which the tenant needs to continue to trade in order to make money for future rental payments. 

Rent Deposit

A landlord may be able to take from a rent deposit to cover any arrears. This will only be possible if a rent deposit was taken prior to the lease being entered into. The terms of the rent deposit deed will dictate the circumstances in which the deposit can be drawn down and the requirements which the landlord must adhere to prior to any draw down. This is an especially useful method for any isolated incidents of arrears, but only where the deposit will be topped back up by the tenant. Where the tenant’s long-term financial health is in question, other remedies may be more appropriate, especially as the use of the rent deposit will waive the landlord’s right to forfeit the lease.

Guarantor

A landlord may be able to recover rent arrears from a guarantor or former tenant. If there is a guarantor in place, the lease will specify the circumstances in which arrears can be recovered from the guarantor. Former tenants of “old leases” (that is, leases which commenced before 1 January 1996) or of “new leases” (that is, leases which commenced on or after 1 January 1996) who have also entered into an authorised guarantee agreement on assignment, will be liable for arrears, as will a standard third party guarantor. Former tenants will need to be served with a notice pursuant to section 17 of the Landlord and Tenant (Covenants) Act 1995 and will only be able to recover arrears that have accrued in the 6 months prior to the notice being served. Importantly, a former tenant who settles the arrears in this way may be entitled to ask the landlord for an overriding lease of the premises which are subject to arrears.

Court proceedings

A landlord can issue straightforward court proceedings to recover the arrears as a debt. Historically, this has never been the remedy of choice and it saw a resurgence only when the pandemic legislation put a halt on everything else. It achieves a court order awarding the sum of arrears which then still needs to be enforced. The court process can often be lengthy and expensive, with not all costs recoverable.

Subtenant diversion notice

Where there is a subtenant in possession, a superior landlord can serve a notice pursuant to section 81 of the Tribunals, Court and Enforcement Act 2007 on that subtenant. The subtenant will then become liable to pay future rent directly (diverting it away from the defaulting head tenant). However, the subtenant will not be liable for the arrears, only future rents. This is therefore a solution to a long standing problem where the “middleman” is the one at fault.

View our forfeiture flowchart

Statutory demand

Any creditor (including a landlord) can “test” a debtor’s solvency by serving a statutory demand which, if unpaid after 21 days, gives grounds for the issue of a winding-up or bankruptcy petition against the tenant (provided the arrears are more than £750 for commercial tenants and £5000 for individual tenants). This method is useful because the threat of insolvency proceedings can often prompt the settlement of arrears without the need for further recourse, therefore avoiding the need for court proceedings and other protracted enforcement methods. However, pushing a tenant into insolvency is unlikely to be a beneficial outcome for a landlord, who will then become an unsecured creditor in any future distribution of assets. As such, this method is quite a bullish way of flushing out whether a tenant has really squirreled away money and is simply choosing to avoid paying rent.

Other Breaches by a Tenant

A different set of remedies is available in the case of breaches which do not involve the non-payment of rent (e.g. breach of a tenant’s repairing obligation or a breach of a tenant’s covenant not to sub-let). Disrepair brings with it its own particular issues, and the protection of the Leasehold Property (Repairs) Act 1938 means that most remedies are ineffective mid-term.

Other breaches may be remedied by:

• A landlord may be able to apply to court for the remedy of specific performance or an injunction. As equitable remedies, a court will only make these orders where damages are not an adequate remedy.
• A landlord may be able to apply to the court for damages to compensate it financially for the tenant’s breach. This method attracts the same drawbacks as all civil litigation does (as touched upon above) in that proceedings can end up being lengthy and costly. The greater the amount of financial loss to the landlord, the more viable this remedy becomes.
• In respect of forfeiture, the same considerations apply as with the use of forfeiture for the non-payment of rent, including the waiver of the right to forfeit (although some breaches of covenant, like unauthorised sharing of the premises, arise afresh every day therefore removing waiver as a potential problem) and the right of a tenant to apply for relief from forfeiture, although the process differs slightly for non-rent breaches in that a landlord must first serve a notice pursuant to section 146 of the Law of Property Act 1925 on the tenant. This notice must specify the breach committed by the tenant and give the tenant an opportunity to remedy the breach (if it is capable of being remedied). This gives an opportunity to the tenant to defend its position and is often better followed with forfeiture by court proceedings, rather than peaceable re-entry, so that all arguments can be flushed out before the tenant is evicted. In the case of a tenant’s breach of its repairing obligation, further restrictions on the landlord’s right to forfeit apply pursuant to section 1 of the Landlord Property (Repairs) Act 1938. If the lease was granted for a term of at least seven years and at least three of those years remain, the section 146 notice has to be served at least one month before any action is brought against the tenant and the tenant has 28 days to serve a counter-notice on the landlord. If a counter-notice is served by the tenant, the landlord must then obtain the consent of the court before exercising its right to forfeit or to claim damages from the tenant.

The lifting of the moratorium will no doubt come as welcome news to commercial landlords. However, in many cases a mutually agreed solution to a breach (e.g. a re-payment plan) may remain the most effective and commercial option with a view to keeping an occupied premises and constructive relationship with the tenant. Landlords should be careful not to inadvertently waive their rights (e.g. in the case of forfeiture) but at the same time should not fall into the trap of resorting to the most punitive remedies as a first resort. In any case, commercial landlords now find themselves with an array of options.

This article was originally published in Estates Gazette on 9 April 2022.