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.
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.