Can’t Pay, Won’t Pay

Dispute
posted by KeithDaniel

Landlords must be sure leases are correctly drafted to enable action against tenants who are not paying their rent.

In a challenging environment for landlords, it is vital they are aware of the options available to them should they face a non-paying tenant. When a lease is being drafted, it is important for landlords to discuss with their solicitor the covenants relating to non-paying tenants, which may ease the situation for the landlord should they need to take action in the future.

For example, a landlord will want to ensure that the lease contains covenants enabling them to:

  • forfeit the lease should the tenant breach the terms
  • claim interest from the tenant with regard to any sums due
  • claim costs from the tenant when enforcing breaches

Moreover, at the commencement, the landlord may want to consider a rent deposit deed (RDD). Although there are no set rules as to the value of deposits, the amount will often equate to between three and six months’ rent. It remains the tenant’s property, but the landlord takes a fixed legal charge over it to secure the deposit, giving them priority over other creditors.

Creating a charge over a deposit was previously problematic because, where the tenant was a company, the charge needed to be registered at Companies House. However, that ceased to be the case from April 2013 when section 859A (6)(a) of the Companies Act 2006 came into force as part of the Companies Act 2006 (Amendment of Part 25) Regulations 2013, which provides that a charge in favour of a landlord on a cash deposit given as a security in connection with the lease does not need to be registered.

While an RDD can provide reassurance for a landlord, many tenants will not be able to pay this amount upfront. So, if an RDD is not in place, what can a landlord do if a tenant fails to pay rent?

In the first instance, they may contact the tenant to clarify the situation and discuss how it might be resolved, especially where the tenant has a good payment history. Contact ought to be made promptly; indeed, if the landlord does nothing, the situation is only likely to get worse, increasing their exposure.

Flexible rent payments have become fairly common in such situations, with tenants for instance paying monthly rather than quarterly, or seeking a temporary reduction in rent to help their business through a difficult time. Some landlords see this as the only way to avoid a tenant’s business failing.

However, if the parties agree to vary the payment terms of the lease in such a way, it is crucial that this is properly documented to avoid problems later. The landlord will want to ensure that any arrangement is personal to that particular tenant, temporary, and something they themselves can revoke at will. Failure to document an agreement properly may result in the lease being varied by conduct, in which case the landlord will not be able to turn back the clock, and the benefit of the variation will pass to any assignee. There is also a risk of the variation being incorporated into any renewal of the lease.

But suppose the tenant refuses to engage with the landlord and simply will not pay? In these circumstances, there are several ways in which the landlord can enforce the lease.

Forfeiture by peaceable re-entry

Such forfeiture occurs when the landlord physically re-enters the premises and takes back possession, bringing the lease to an end. There is no statutory right for a landlord to do this, so it is vital that the lease contains a forfeiture clause enabling this course of action when the tenant breaches the covenants. Moreover, it is essential that the right to forfeit has arisen and not been waived by the landlord.

The most common breach leading to forfeiture is failure to pay rent: in such circumstances, the landlord must decide whether to allow the lease to continue or forfeit. If the latter, it is imperative that the right to forfeit is not waived. This is a crucial point for landlords to consider, as merely requesting or accepting any payment of rent can waive the right, because those actions accord with the lease continuing.

Moreover, even if the parties agree that requesting or accepting payment of rent will not waive the right to forfeit, by doing either of those things the landlord is acting consistently with the continued existence of the lease and, as such, the right to forfeit will be waived. If this happens, the landlord will have to wait for it to arise again, which would usually be when the next quarter’s rent falls into arrears.

It is of course important for the landlord to consider carefully whether forfeiture is the right route to take by comparing the benefits against the potential drawbacks. For instance, will they be able to find a new tenant? And will the forfeiture release any guarantors?

The process of forfeiture can be fairly straightforward. Usually, bailiffs are instructed to attend the premises with a locksmith. Once an inventory of goods has been taken, the locks are changed and a notice is placed prominently on the premises stating that re-entry and forfeiture has taken place. At this stage, the lease will come to an end.

The tenant then has the option of doing nothing, in which case the landlord can find another tenant and pursue the defaulting tenant for payment, or applying to the county court for relief from forfeiture. It is important to note that if the tenant pays all sums due to the landlord, relief from forfeiture will normally be granted, in which case the tenant can re-enter the premises and proceed to trade as normal.

Landlords tend to believe that tenants only have six months from the date of forfeiture to make an application for relief, but the case of Pineport Limited v Grangeglen Limited [2016] EWHC 1318 (Ch.) is a stark reminder that there is no such deadline.

In this case, the landlord peaceably re-entered in April 2014. In June 2015 – that is, 14 months later – the tenant sought relief and the court had to decide whether the delay meant that they were not entitled to it. The court confirmed that its discretion to grant relief is broad; although delay may be the decisive factor, it considered other circumstances, including whether the landlord could show that it would be prejudiced by granting relief. In all the circumstances, the court found that it was just and equitable to grant relief provided the tenant paid all sums due to the landlord.

While it is important to consider the fact that the landlord had not re-let the premises, this decision certainly demonstrates the court’s approach when deciding whether or not to grant relief from forfeiture for non-payment of rent.

Commercial rent arrears recovery

Commercial rent arrears recovery (CRAR) became an option on 6 April 2014 under the Tribunals and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013. It allows a landlord to instruct an enforcement agent to take control of a tenant’s goods after seven days’ notice, and then sell those goods to recover a value equivalent to the rent arrears, although not including service charges and insurance. Using CRAR will waive the right to forfeit and, once goods are taken, seven clear days must pass before they can be sold.

Although this method of enforcement does not appear to be as popular as forfeiture, it is a very useful one for the landlord to consider where the tenant has assets that can be seized.

Money claim

If a landlord does not want to bring the lease to an end via forfeiture or use CRAR, the landlord can instead sue the tenant for the sums due in the county court. A letter before claim ought to be sent to the tenant setting out the basis on which the claim will be issued along with a summary of the facts, what the claimant wants from the defendant and how the debt is calculated. Of course, a landlord will rely on the provisions in the lease for this purpose.

If the landlord does not receive a satisfactory response from the tenant, they can commence court proceedings. Assuming that the arrears are less than £10,000 it is likely that the claim, if defended, will be allocated to the small claims track. While costs are not normally recoverable this way, most leases include a clause stating that the tenant will be liable for the landlord’s costs when enforcing a breach.

Subject to any specific enactment, including the Civil Procedure Rules (CPR), costs are always at the discretion of the court under section 51 of the Senior Courts Act 1981. Moreover, CPR 27 provides that the court can only award costs in very limited circumstances when on the small claims track, and the terms of a lease do not form the basis of one of the exceptions.

However, in the case of Robert Shaw v Nine Regions Limited [2009] EWHC 3553 (QB), Justice Roderick Evans held that the landlord’s contractual entitlement to costs trumped CPR 27, although it should be noted that this judgment was very brief and gave no explanation for the ruling.

The question of whether the county court has the power to order a tenant to pay costs to the landlord under the terms of the lease where the case was allocated to the small claims track was finally resolved by the Court of Appeal in the case of Chaplair v Kumari [2015] EWCA Civ. 798. Although the judgment again did not clearly explain how the court was able to disregard rule 27, it provided certainty – which is, of course, good news for landlords. The Court of Appeal held in favour of the landlord, and the small claims track did not limit the costs awarded to the landlord.

Note that, in cases concerning more than £10,000 of arrears, there is unlikely to be much of an issue with regard to costs because such claims, if defended, would be allocated to either the fast track – up to £25,000 – or multi-track – for more than £25,000 – of the county court, on which the winning party generally obtains a cost order against the losing party.

Finally, it is important for landlords to consider the possibility of entering into an authorised guarantee agreement (AGA) when a lease created on or after 1 January 1996 is being assigned. An AGA places an obligation on the original tenant to guarantee the performance of the new tenant, that is the assignee. If the latter breaches any covenant, including paying rent, the AGA will allow the landlord to pursue the original tenant. It also enables the landlord to insist that the original tenant take up a new lease on the terms of its current one if the assignee defaults and the existing lease is disclaimed.

It is crucial for landlords to obtain legal advice when entering into a commercial lease, as failure to include certain clauses such as a forfeiture clause could have dire consequences. Moreover, when assigning a lease, it is likewise recommended that a landlord always takes advice to keep their position as protected as possible.

Originally published in Property Journal: July-August 2019 

Jane Rees is an associate at Berry Smith Lawyers - for more information about Jane. please click here

029 2034 5511

jrees@berrysmith.com