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Rent arrears

Recovering Arrears Owed By Tenants - A Guide

Step 1 – Preliminary considerations

Before taking any action to recover arrears, landlords should consider the following issues:

  • Can some short-term arrangement alleviate the tenant’s financial difficulties, e.g. a concessionary rent, monthly rent payments etc.? Such arrangements should always be documented and signed by both parties, as well as any guarantor.
  • Would there be any advantage in forfeiting the lease? (If so, see our Guide to Avoiding Waiver)
  • Is the debtor in any form of insolvency and, if so, what implications does this have for the methods of recovery available? (If so, see our Guide to Tenant Insolvency)
  • Is it worth trying to do a deal with the tenant, e.g. a surrender or variation of the lease, payment by instalments?

 

Step 2 – Consider the methods of recovery available

Pursuing subtenants

Where a landlord is entitled to use CRAR to recover rent from its immediate tenant, it can serve notice on its subtenant to entitle it to recover and receive rent direct from the subtenant until such time as the arrears are settled or the notice is replaced or withdrawn.

This right arises under section 81 of Tribunal Courts and Enforcement Act 2007. The notice must comply with the relevant regulations as to form and content including specifying the “notified amount” i.e. the amount of the arrears recoverable from the tenant by CRAR. The subtenant will become liable to pay the sums demanded by the notice 14 clear days after service; if it fails to pay, the landlord is entitled to exercise CRAR against it.

Advantages:

  • Fairly simple procedure.
  • May give immediate cashflow.

Disadvantages:

  • Need to serve fresh notices if the tenant’s arrears continue to accrue. The notice you serve can’t cover future arrears?
  • Notice could act to reduce the tenant’s income, possibly causing the tenant further financial difficulties.
  • Only engaged once the landlord is entitled to exercise CRAR.

Pursuing existing guarantors

Depending on the wording of the lease, a guarantor to a lease generally has a co-extensive liability with that of the tenant.

Landlords need to be careful not to release guarantees during their dealing with the tenancy. A guarantor will be released if any variation is made to the underlying contract unless:

  • the guarantor has consented to the variation;
  • the variation is self-evidently insubstantial or non-prejudicial; or
  • the guarantee contains protective wording to preserve the guarantor’s liability.

Landlords need to bear these principles in mind when dealing with arrears situations, as giving time or “indulgence” to the tenant beyond that contemplated by the contract may release the guarantor unless there is an express lease provision to prevent this.

Landlords can issue Court proceedings or serve a statutory demand in order to pursue a guarantor in respect of its liabilities. However, a guarantor may raise as a defence any defence which the tenant would have had to a claim for payment, e.g. any set-off or counterclaim.

Advantages:

  • Fairly simple procedure.
  • May give immediate cashflow.

Disadvantages:

Care needed to avoid risk of releasing guarantors if underlying contract is varied.

Pursuing former tenants and guarantors

It may be possible to pursue former tenants or guarantors depending on whether the tenancy is an “old” or “new” tenancy and the terms of any contractual arrangements.

“Old” tenancies

These are:

  • tenancies granted before 1 January 1996;
  • tenancies granted pursuant to an agreement entered into before 1 January 1996; or
  • tenancies granted pursuant to a Court Order made before 1 January 1996.

With an “old” tenancy, the landlord can pursue the original tenant and, depending on the wording of the lease, the original guarantor for a subsequent tenant’s arrears.

A landlord under an “old” tenancy can also pursue subsequent tenants and guarantors who covenanted directly with it to perform the lease covenants for the remainder of the term. This covenant is usually contained in the Licence to Assign.

“New” tenancies

These are tenancies granted on or after 1 January 1996, other than those tenancies entered pursuant to an agreement or Court Order made before that date. (See above on “old” tenancies).

With a “new” tenancy, the landlord can only pursue a former tenant who has signed an Authorised Guarantee Agreement (“AGA”). An AGA cannot require a former tenant to guarantee the performance of the lease covenants by any person other than the assignee, i.e. once the immediate assignee of the former tenant is released from its lease covenants, the relevant former tenant is similarly released from its obligations under the AGA.

Notice

With both “old” and “new” tenancies, landlords are required to give notice to a former tenant/guarantor of its intention to recover its tenant’s arrears of fixed charges from that former tenant or guarantor. (This is required by section 17 of the Landlord and Tenant (Covenants) Act 1995). Notice must be given before action is taken by the landlord to recover the arrears from the former tenant or guarantor.

“Fixed charges” = rent (including any sum reserved as rent by the lease), service charges (as defined by section 18 of the Landlord and Tenant Act 1985) and any liquidated sum payable under the lease as a result of a tenant breach of covenant.

Although the need to serve a section 17 notice applies to former tenants and guarantors under both “old” and “new” tenancies, remember that a landlord can only pursue a party connected with a new tenancy if it is liable under an AGA. (See above on “new” tenancies).

A section 17 notice must be served within 6 months of (and including) the date when the fixed charge became due, e.g. notice in respect of rent due on 25 March 2020 must be served by 25 September 2020. If the landlord fails to serve the notice in time, he will lose the right to pursue the former tenant/guarantor for those arrears.

Overriding lease

If the former tenant/guarantor pays the sums demanded by the section 17 notice, it can require the landlord to grant it an overriding lease of the premises, i.e. the former tenant/guarantor will become the landlord’s direct tenant. The landlord therefore needs to consider (before any notice is served) whether it would be willing to have the former tenant/guarantor as its direct tenant.

Advantages:

  • Fairly simple procedure.
  • May give immediate cashflow.
  • May get new direct tenant with stronger covenant.

Disadvantages:

  • May get new direct tenant with weak covenant.
  • Need to serve fresh notices if the tenant’s arrears continue to accrue.

Commercial Rent Arrears Recovery (CRAR)

CRAR replaced distress in April 2014 and is governed by the Tribunal Courts and Enforcement Act 2007 (the “2007 Act”) and the Taking Control of Goods Regulations 2013.

This method of recovery allows a tenant’s goods to be seized and sold without any court order, but it imposes restrictive pre-conditions.

CRAR is generally only available for leases of purely commercial premises, as it is unavailable if the property (or any part of it) is:

  1. let under the immediate lease as a dwelling;
  2. let as a dwelling under an inferior lease; and/or
  3. occupied as a dwelling.

However, CRAR is still permitted where the premises are let (or sublet) for commercial use only and are being used for residential purposes in breach of the lease or underlease.

CRAR may only be used to recover “pure” rent (and any interest or VAT payable thereon). It cannot be used to recover arrears of rates, council tax, services, repairs, maintenance or insurance, even if these amounts are reserved as rent under the lease. Where a lease provides for an inclusive rent (i.e. one that includes an element relating to other expenses, such as business rates or utilities), only the proportion that is reasonably attributable to the possession and use of the premises is recoverable under CRAR.

Only a certified enforcement agent can take control of and sell goods using CRAR, and they are required to serve “notice of enforcement” on the tenant before entry is permitted for the purpose of seizing the goods. The minimum period of notice is seven clear days (excluding Sundays and bank holidays).

The level of rent arrears when notice of enforcement is given and when control of goods is taken must be equivalent to at least seven days’ “net unpaid” rent.

 

"Net unpaid rent" = the amount of rent in respect of which CRAR is exercisable, less any interest or VAT included in the rent arrears and any deductions or set-off that the tenant would be able to claim

N.B. Although CRAR is exercisable in respect of interest and VAT, these amounts are excluded from the calculation of the net unpaid rent.

 

In order to exercise CRAR, the enforcement agent must do one of the following things:

  • Secure the goods on the premises.
  • Remove the goods from the premises and secure them at a different location.
  • Enter into a controlled goods agreement with the tenant.

The exercise of CRAR can take place on any day of the week between the hours of 6am and 9pm, although the court can override these restricted hours. If the premises are open for the purposes of the tenant's trade or business, CRAR can be exercised during these business hours, even if they fall outside of the permitted hours.

The enforcement agent cannot take control of exempt goods, which include items of equipment which are necessary for the tenant's personal use in the tenant's employment, business, trade, profession, study or education. This includes computer equipment and vehicles. This exemption only applies where the aggregate value of the items is up to £1,350. Items valued over this threshold may be seized.

Advantages:

  • May give relatively quick cashflow.
  • Puts significant pressure on tenant.

Disadvantages:

  • Distress could restrict the tenant’s ability to trade, possibly causing the tenant further financial difficulties.
  • Complex rules limit the use of the remedy.
  • Storage and insurance of the goods may need to be arranged.

Serving a statutory demand

This is an indirect method of recovery, as a statutory demand can be used by a creditor as the first step towards petitioning for the bankruptcy or winding-up (as the case may be) of the debtor.

In order to serve a statutory demand, the following conditions must be satisfied:

  • the debtor must owe at least £750 (or £1,000 if the debtor is an individual);
  • the arrears must be a liquidated amount; and
  • the debt must be undisputed.

A creditor should also consider whether the debtor has any potential counter-claim against it, which could allow the statutory demand to be set aside.

If the debtor does not pay the arrears within 21 days of service of the statutory demand, the creditor can present a bankruptcy or winding-up petition. A landlord will only rank as an unsecured creditor in any bankruptcy or liquidation. So, before issuing any petition, a landlord needs to consider whether the debtor has sufficient assets to make him worth pursuing.

Advantages:

  • Can be served relatively quickly.
  • May put significant pressure on debtor.

Disadvantages:

  • Costs of presenting petition may be fairly substantial but may not be recovered.
  • Landlord only ranks as unsecured creditor in bankruptcy/liquidation.
  • May be insufficient assets in bankruptcy/liquidation to settle landlord’s claim for loss as a result of any disclaimer of the lease.

Using the rent deposit

Before using any rent deposit, a landlord should check the terms of the Rent Deposit Deed to ensure that it covers the particular arrears owed by the tenant. A landlord also needs to check on notice requirements in the Rent Deposit Deed, e.g. there may be a requirement to give notice to the tenant before making a withdrawal from the deposit.

The Rent Deposit Deed will usually allow the landlord to require the tenant to replenish the rent deposit. If the tenant is having financial problems, it may be unable to do so. Accordingly, before withdrawing from the rent deposit, a landlord should consider whether it would prefer to keep the rent deposit to use to settle other arrears in the future, particularly where these future claims could be more complicated, e.g. damages for dilapidations.

Remember: If the landlord serves notice to require the tenant to replenish the rent deposit but the tenant fails to do so, this may give the landlord a further right to forfeit the lease. Check the terms of the Rent Deposit Deed to see if this is possible.

Advantages:

  • Fairly simple procedure.
  • Gives immediate cashflow.

Disadvantages:

  • May put the tenant under less pressure than some other methods of recovery because it has less direct effect on its financial position.
  • Less monies to cover future liabilities if the tenant fails to replenish the deposit.

Issuing proceedings

Given the numerous other remedies available to landlords, issuing proceedings should usually be a last resort.

Before issuing and serving proceedings to recover arrears, landlords need to consider whether the debtor has sufficient assets to make him worth pursuing.

Once the Claim Form and Particulars of Claim have been served, the debtor has 14 or 28 days in which to serve a Defence, depending on whether an Acknowledgment of Service is filed.

If judgment in default or summary judgment is not available, the Court will give directions to progress the proceedings to trial.

Advantage:

  • Puts pressure on the debtor.

Disadvantages:

  • Fairly complicated procedure.
  • Can take time to obtain judgment, if judgment in default/summary judgment unavailable.
  • Costs often higher than with other methods of debt recovery and further costs may be incurred on enforcing any judgment.
  • Some lack of control over proceedings once they are in progress.

 

Step 3 – Select the appropriate method of recovery

A landlord should consider the circumstances of its case and its overall objectives – see see flowchart below on tactical thinking in the case of arrears owed under commercial leases.

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