Commercial Property - Landlord Update
June 2009
Introduction
For
many landlords and tenants alike, the recent unprecedented slow-down in
consumer spending has had a direct knock-on effect on property and
especially on landlords.
In the last year many well known names have
disappeared from the high street along with innumerable small
businesses. For landlords these are worrying times. Freehold and
leasehold prices have stalled at best and have dropped in some cases,
but more worrying is the implication of having empty premises.
We act for many landlords who own all types
of commercial properties from office blocks to factories to corner
shops. Whilst the markets may be very different, the implications of
losing tenants are the same. This circular is intended to advise
landlords both on warning signs of tenants having difficulties and
also, and more importantly, what can be done if the landlord is
presented with a tenant who is in severe financial difficulty.
Warning Signs
Whilst
tenants are paying rent, the landlord often does not pay much attention
to the status of the tenant. However, when payment is delayed or a
request is made for monthly rental payment rather than quarterly
payment, the landlord should take immediate action. The typical warning
signs that a tenant is in financial difficulty include:-
- Different
payers of the rent, if for example a different company other than the
tenant company pays the rent or in the case of smaller properties a
family member;
- Request to change to monthly payments rather than quarterly payments;
- Lease terms not being complied with;
- Premises deteriorating under the tenancy;
- Redundancies in the business operated by the tenant;
- News articles about the tenant business;
- Rumours of bankruptcy/insolvency;
- Request for subletting or assignment;
Pro-Active Steps by you the Landlord
The
most effective way of ensuring that you are fully informed is to stay
in regular contact with the tenant and create a direct line of
communication with the person responsible for the property, if it is
within an organisation, or the occupier direct;
You
must act quickly if there is rental default. We are often contacted by
client landlords when the tenant is in significant rental arrears.
Often, by this stage, it is too late to take effective action if the
tenant is in financial difficulties and the effort of paying back the
arrears makes the business unviable. We always advise taking immediate
action if any rent, insurance or service charge is paid late. This
needn't invoke a 'heavy hand' but a 'helping hand'. Of course, if the
helping hand is rejected then the heavy hand will be needed!
Remedies for the Landlord
- Letter before action
- this should be issued before proceedings are issued in the Court. You
should consult with us in regard to this letter, as if it is not
properly drafted it may create problems in obtaining your costs and
interest from the tenant;
- Court action - This may be
the only avenue available if the commercial premises contain
residential parts and our advice should be obtained in regard to this.
In other situations the following remedies are also available:-
- Distraint
- Distraint is the right of the landlord to take possession of goods in
lieu of any monies owed (normally rent). It is a common law right
backed up by statute. There have been proposals to replace it with a
modified regime (this is called Commercial Rent Arrears Recovery,
though this has not been enacted by Parliament and will not be enacted
for the foreseeable future. To distrain on goods legally is a complex
area and one you should take advice on from a solicitor and/or a
certified bailiff.
- Forfeiture - If you look at the terms
of your lease you will note that there are various options giving rise
to forfeiture of the lease. The most normal forfeiture rights are for
rent unpaid and dilapidations. (i.e., failure by the tenant to put or
keep the property in the state of repair required by the lease). This
is a powerful remedy and one that is being looked at by the Law
Commission and which may change shortly. Again, this must be done
lawfully and we would urge you to seek advice from a solicitor and/or
certified bailiff. An oral tenancy gives no right of forfeiture.
- Third Party Recovery Actions
- Is there any one apart from the tenant who can be made to pay, such
as sub-tenants, guarantors or the original tenant? Under Section 6 of
the Law of Distress (Amendments) Act 1908 a landlord can serve notice
on a sub-tenant requesting all future rents to be paid direct and
missing out the non-paying intermediate tenant. Whilst this may not
recover rent already owed, it will stop further rents owed accruing.
The landlord should also check the guarantor provisions of the lease,
especially if the tenant is a limited company (usually a director acts
as a guarantor). On leases granted before 1996, any previous tenants of
that lease can be found liable for the rents due from the subsequent
assignment (please note that there are strict time limits to be adhered
to, please consult us if you need further information). Similarly, for
leases after 1996, Authorised Guarantee Agreements are usually entered
into on an assignment; (these 'AGAs' put the assignor (the person
leaving) in the position of guarantor for the new tenant. These should
be checked and appropriate action taken against the relevant party if
applicable.
- Insolvency/Bankruptcy - You will note from
your lease that there is invariably an insolvency/bankruptcy provision
in the lease so that the landlord can forfeit the lease in the event
that the tenant becomes insolvent or bankrupt. If rents are owed then
the landlord can make a statutory demand for the monies owed and if not
paid then the provisions of insolvency/bankruptcy can be implemented.
Again, we would urge you to seek our advice on this matter. However,
the appointment of a receiver raises different issues, and you must
take advice.
In these uncertain times landlords must be
pro-active in their approach to managing their tenants. If we can be of
any assistance in dealing with tenant arrears or advice generally on
Landlord and Tenant affairs please do not hesitate to contact us.
Article Written by:Martin Everett
Solicitor.
Everett Tomlin Lloyd & Pratt, Pontypool