Weighing up the options for rent recovery
For those landlords with rent arrears stretching back to March 2020, issuing court proceedings may be a tempting option. But, asks Emma Humphreys, is initiating them worthwhile?
The continuing restrictions on certain remedies for commercial lease arrears mean that many of the “normal” options for landlords to recover rent arrears from tenants are off the table until 2021.
In cases where arrears are still owed from March 2020 and there has been no real engagement to try to agree alternative payment arrangements, many landlords will feel that they cannot continue to fund the support of those tenants. But is there any point in pursuing court proceedings for the recovery of the relevant arrears, and how are such claims likely to progress?
Procedural nuts and bolts
Procedurally, rent claims should be reasonably straightforward, although there can sometimes be complications with claims against guarantors or where there is an outstanding dispute with the tenant which leads to a counterclaim being raised. Claims are usually issued swiftly by the courts and judgment may be obtained within a few months, depending on how the defendant responds and how quickly the particular court deals with its paperwork. In most cases, early judgment should be available even if a defence is filed – via summary judgment on the basis that there is no real prospect of the tenant or guarantor successfully defending the claim.
Costs-wise, the standard court issue fee is 5% of the value of the claim if it exceeds £10,000, or there is a fixed £10,000 fee where the claim value is more than £200,000. However, the fee should be recovered from the defendant as part of the claim. The extent to which the landlord’s legal costs will be recovered will often depend on the terms of the relevant lease. A reasonable level of costs recovery can usually be expected, although the decision is ultimately down to the court.
Enforcing a judgment
Of course, obtaining judgment is just the first step. If a defendant does not pay the sum ordered, then the landlord will need to take steps to enforce the judgment. For example, the option to seize goods via a court enforcement officer remains available. This may seem somewhat strange given that the government has consistently sought to extend the restrictions on Commercial Rent Arrears Recovery, so that a landlord’s ability to seize goods without the court process is now effectively off the table until April 2021 (unless there is pre-coronavirus debt).
Nonetheless, there is always the risk that the debtor’s goods seized will be of insufficient value to settle the judgment sum, or other reasons why a landlord may be reluctant to use this remedy. If so, then landlords may find they have rather limited choices for seeking recovery. Charging orders are often a remedy of preference if the debtor is an individual who owns property or shares, but are less likely to be appropriate where the debtor is a company.
Another option is for the landlord creditor to seek a third-party debt order to seize funds belonging to the debtor which are held by a third party, for example in a bank account. A creditor is only entitled to the amount in the relevant bank account on the day the order is served, and there is no guarantee as to how much that might be. However, the application is made without notice to try to avoid the debtor moving money out of the account in advance to avoid the effect of the order.
The difficulty with these applications can be obtaining sufficient details concerning the debtor’s bank or building society account, as the court will not grant speculative applications. If there is insufficient information to evidence the relevant details of the debtor’s account, the landlord may need to apply for an order requiring the debtor to attend court to provide the relevant information. This can involve significant costs and further delay. However, if the landlord already has the relevant account details to provide to the court, the application may well yield prompt payment from the debtor.
A worthwhile option?
It is evident that the steps that may be required to enforce a court judgment can involve additional time and costs over and above those already incurred in pursuing the claim. Landlords should be mindful of these factors and cast a critical eye over any suggested guarantees that court action will result in prompt cash flow.
However, it is worth landlords considering whether court proceedings are now the appropriate course to pursue against tenants or guarantors who have failed to engage with them in a meaningful way to date. The service of a claim showing the seriousness of the landlord’s intention may well lead to payment. In particular, a debtor should be concerned about the potential increase to their liability resulting from a judgment that awards interest and costs. There are also the potential effects on the debtor’s business of being subject to one or more of the methods of enforcement described above.
The alternative is for landlords to wait to see if the restrictions on forfeiture and winding-up petitions are released for January 2021 – although both options may be of limited use for recovering sums owed and many landlords will be reluctant to use them. With the continuing impact of Covid-19 and a difficult winter ahead, it also seems unlikely that the government will want to smooth the path for landlords to close down businesses. This means it could well be April 2021 – if CRAR returns “meaningfully” at that time – before landlords will have an option for direct action to recover arrears.
This article was written by real estate partner, Emma Humphreys at Charles Russell Speechlys LLP and was first published in Estates Gazette on 19 October 2020. For more information, please contact Emma on +44 (0)20 7203 5326 or at firstname.lastname@example.org.