Rent recovery - what options are available to commercial landlords?

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During the coronavirus pandemic, protections were introduced to restrict a commercial landlords’ ability to recover rent arrears and evict tenants. All restrictions ended on 31 March 2022 and the options available to landlords returned to their pre – pandemic state. It seems timely at this point to issue a reminder on what the basic legal remedies are in this area.

Pre – Action Correspondence

Although there is no requirement to do so, it is generally good practice to, at the outset, issue a letter before action in the form of a 7 or 14 day demand for payment letter. This letter will outline the outstanding rent owed, interest and the consequences of non – payment, including the potential liability for legal expenses. If a letter before action fails to recover payment within the necessary period, the landlord can initiate any of the following enforcement procedures.

Summary Diligence

Parties to a lease can consent to having the lease registered for Preservation and Execution in the Books of Council and Session, which allows rent arrears to be enforced through summary diligence without raising a court action. Most commercial leases in Scotland are registered in the Books of Council and Session, but it is important to check the terms of your lease before initiating proceedings. Summary diligence involves instructing officers of the court (sheriff officers in Sheriff Court actions and messengers – at -arms in the Court of Session) to act on behalf of the landlord.

The first stage is usually a charge for payment. This involves a written demand for payment being served on the tenant, allowing them a further 14 days to make payment. If no payment is made following the expiry of the 14 day period, the sheriff officers can proceed to arrest the tenant’s bank account and it is possible for the landlord to initiate winding up/ insolvency proceedings.

Arrestment secures money or moveable property in the hands of a third party to secure payment to the landlord. The most common use is to arrest the funds held in the tenant’s Scottish bank account. Landlords should be aware that arrestment only applies to the funds due at the time of arrestment, making the time of arrestment crucial. There is a duty for the tenant to disclose the arrestment of funds within three weeks of arrestment and it is possible that, at this stage, a tenant may sign a mandate to have the funds owed transferred. If payment is still not secured, arrested funds will be released to the landlord after 14 weeks, or a court action can be raised to authorise release.

Court officers can also perform attachment, enabling a landlord to “attach” the tenant’s goods and equipment. The goods will then be valued and “tagged” by the sheriff officer to cover the value of the debt. If the debt remains unpaid, the goods will be sold at auction to recover payment. Attachment extends to money attachment which allows court officers to attend premises occupied by the tenant to secure cash to the value of the debt. The attachment will be reported to the court within 14 days and can then be transferred to the landlord, following the expiry of a further 14 days. To complete attachment, a charge for payment notice must have been issued and the time outlined, have expired.

During the pandemic, restrictions were placed on the enforcement of summary diligence and, although the restrictions ended on 25 March 2022 it is worth staying up to date with ongoing changes to the legislation.

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Irritancy is the Scottish equivalent of forfeiture in England and Wales and can apply to monetary and non- monetary breaches of a lease. Some common examples of when Irritancy is exercised by a landlord include, non – payment of rent, the tenant allowing a property to fall into disrepair and a change to a tenant’s status.

Irritancy offers a means for terminating a tenancy and removing a tenant on the grounds of breach. Monetary breaches are governed by s.4 of The Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 (“The 1985 Act”). The 1985 Act requires a landlord to first issue a pre irritancy notice, outlining the total amount owed and give the tenant a final opportunity to make payment. A pre – irritancy notice must stipulate that if payment is not made within the required period, the lease will be terminated. The minimum period for payment in a pre – irritancy notice is 14 days, but if a longer period is stipulated in the lease agreement, this will prevail. Following the expiry of the period of notice, the landlord is then able to issue an irritancy notice, terminating the lease and removing the tenant. Irritancy can be purged by payment being made by the tenant and is often a good negotiation tactic for landlords to encourage payment.

Statutory demand for payment

A landlord can serve a statutory demand on a tenant who is failing to make rent payments. If payment is still not made, a winding up petition can be presented. Again, during the pandemic, legislation was introduced to prohibit a winding up petition being presented under The Corporate Insolvency and Governance Act 2020. This restriction ended on 31 March 2022 allowing landlords to again exercise this right.

In Scotland, an additional security exists in the form of “hypothec”, kicking in when a tenant enters insolvency proceedings. Hypothec grants the landlord security over the tenant’s goods and fixtures present in the leased property up to the value of any pre – insolvency unpaid rent. Landlords should be aware of and willing to raise their knowledge of this, to the tenant’s insolvency practitioner to ensure goods are not removed or disposed of from the premises without the landlords’ consent.

It is worth noting that any winding up petition will involve legal costs and insolvency practitioner’s costs in getting to the point of liquidation. At this stage all other creditors, secured and unsecured, can seek a ranking for their claim, so in some cases any dividend may be minimal.

Rent deposit

Generally, in commercial leases, a tenant is required to pay a deposit at the start of the tenancy and in the event of non – payment, a landlord may have the option to use this rent deposit to withdraw and recover arrears. Before doing so, the landlord needs to check the terms of the rent deposit agreement to ensure withdrawal is permitted.

Third party guarantee

A commercial lease may contain a third-party guarantee to the tenant’s obligation which would allow the landlord to recover any rent arrears from the third-party guarantor. Again, the terms of any guarantor agreement must be considered before enforcement is considered. Methods of seeking recovery from the tenant must be exhausted before going to the guarantor.

As mentioned, although most restrictions introduced during the pandemic have subsequently been removed, it is important to review the latest guidance and the terms of your lease prior to initiating any of the above processes.

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