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Feeling The Pinch?

» Posted on: 24 February 2008
» Posted by: Barry Challender
» Service area: Commercial Property

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It’s a situation that the current economic climate will only make more common – you have a business tenant who has stopped paying their rent, but what can you do?

If the UK recession that some are predicting arrives this will of course make already tough business conditions here in Lancashire even tougher. With less money to go round landlords and tenants of business premises are amongst the first groups who will be drawn into conflict.

You may own a large property portfolio or just the freehold of one building. Alternatively, you may be a tenant who has sub-let a part or the whole of the property and although you are paying the rent to the landlord, your sub-tenant is not paying you.

As landlord you should be aware (and as tenant you should be wary!) of the following remedies:

Landlords can for the time being still exercise their ancient common law right of “distress” to remove and sell goods to the value of the arrears (although this is set to change under a new Act of Parliament). The arrears must be of rent (or sums expressly reserved as rent such as insurance premiums and service charge) and unquestionably due. A certified bailiff should always be used to act as the landlord’s agent but they must attend in daylight hours and no force can be used.

An alternative remedy is that of forfeiture. Using this method the landlord can get back possession of the property by terminating the lease. The Lease must contain an express clause which allows the landlord to re-enter and terminate the lease. Often the lease terms will provide that the landlord may forfeit if the tenant is in arrears of 21 days or more. The landlord may simply re-enter the premises and change the locks (but this is only advisable where there is unlikely to be physical conflict e.g. if the property is empty. Alternatively, the landlord may issue court proceedings seeking an order for possession. Until the claim is determined the tenant may remain in possession. Tenants can in certain circumstances apply to the court for relief from forfeiture and if the tenant pays the landlord’s costs and the rent arrears before the final hearing, the proceedings will be frozen or “stayed”.

Landlords and tenants should note that there are complex rules whereby a landlord may inadvertently “waive” the right to forfeit after the right has arisen. For example, if rent is payable quarterly in advance and the tenant fails to pay the rent due on 24 June if the landlord demands rent after the 21 days allowed in the lease has expired, even if this is due to a clerical error by the landlord’s agent, the landlord will have lost its right to forfeit for that particular breach.

Any sub-lease is automatically brought to an end if the superior lease is forfeited, but a sub-lessee may also apply to the court for relief from forfeiture.

The tenant may have provided guarantors in which case a landlord should consider whether to call on them for the arrears. In leases that were granted before 1 January 1996, if the current tenant is an assignee of that lease, the landlord may recover from the original tenant (or its guarantor) for arrears up to 6 months old.

If the arrears are over £750 (and again there is no question of them being in dispute) the landlord may serve a Statutory Demand. If the sum demanded is not then paid within 21 days of receipt the landlord may commence insolvency proceedings against the tenant.

However, for landlords and tenants alike one of the best ways to deal with the situation where a tenant is genuinely in difficulty is to keep the lines of communication open and if the lease is not viable, to agree that the relationship be brought to an end by mutual consent. Although it is possible to do this by the tenant simply handing back the keys, it is usually better to set out the terms in a formal Deed of Surrender so that there is no doubt about both parties’ liabilities when the lease is finally brought to an end.

Also, as with any dispute the most valuable (and least costly!) legal advice is usually that which is obtained just before or just after the dispute has arisen.

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