07/01/2009

Keeping ahead in troubled times

When landlords and tenants alike are forced upon hard times, the available remedies are not always clear. Rash, ill-informed decisions can lead to parties suffering unnecessary hardship.

Forfeiture

As a landlord it can be all too easy to terminate a lease to try and mitigate your loss when a tenant runs into significant arrears, but it is important to understand that forfeiture may not always be the best option.  With the abolishment of empty property rate relief, forfeiture may be a costly exercise to any landlord as they will become the party that holds the liability for the rates on the property. 

However, as tempting as it can sometimes be for a landlord, it is important not to accept part payment of invoices or selective payment by tenants of invoices. The acceptance of such payments can amount to a waiver of the right to forfeiture, so a careful and strategic approach is required when invoicing and accepting funds from tenants.

Where a landlord is party to a lease that has been previously assigned, it is important that you also examine your rights to call upon previous tenants who have offered guarantees, in order to guarantee the current tenant’s liabilities. It is very important that the timely service of section 17 notices is adhered to, so as not to lose the statutory protection of the Landlord and Tenant Act.  Failure to serve a section 17 notice on authorised guarantors and guarantors of old leases (pre 1 Jan 1996) within six months of the monies becoming due and payable can result in the loss of ability to pursue rent from guarantors.  This does not apply where you have a guarantor to a lease that is merely a contractual obligation and does not require the service of section 17 notices. 

As a tenant it is also important to understand that if the landlord is trying to exercise his right of forfeiture, you have right up until the moment that the landlord takes peaceful re-entry of your property to apply for relief from forfeiture.  In many cases, as long as the arrears are repaid and the landlord’s solicitor’s costs are met, relief should be granted. 

Distraint

If a landlord chooses not to forfeit the lease he can also go after a tenant in arrears, pursuing them by the Courts and suing them for the arrears, or potentially distraining against goods that are in the premises. 

Whilst the Court route may be costly and often fruitless, it is sometimes worth considering distraint. However, landlords must be aware that on distraint, the tenant must own the goods and cannot distrain against tools of a trade up to the value of £150. Nor can they distrain against tools of a trade that are actually in use.  Moreover, a tenant must not enter the premises and simply distrain against goods himself, but must enlist the services of a certified bailiff. 

The tenant must also be alert to the fact that some of the goods may be on hire purchase or be leased. In some circumstances, landlords may also have signed a waiver expressly confirming that they will not distrain against certain goods that do not belong to the tenant.  Care and diligence must be exercised when selecting which goods to distrain against.

Key Points to Note

There are many different issues that all parties are faced with when arrears or breach of covenant arise under a lease and the first remedy that comes to mind is not always the best route to follow.

1.         Communication

As a tenant or a borrower, the key is to talk as soon as possible to your landlord or bank.  If you are having difficulties you could perhaps look at re-scheduling payments, taking a payment holiday or moving to monthly rental payments as opposed to quarterly to ease cashflow problems. Better still, try to negotiate a more manageable rent.  You may be surprised at the response you get from your landlord, but unless they are confident at re-letting the property the last thing they want to be left with is rates liability on an empty property.  In addition, rents may have fallen and if they were to re-let they may only be able to re-let at a figure that you are actually proposing.

If you are a landlord and you have a defaulting tenant, it is important that you act as quickly as possible to give secure payment, or take the property back and try and re-let it.  There is nothing to be gained from delaying.  However, you do need to consider being left with an empty property attracting rates liabilities.  It is therefore important that you understand all the remedies that are available to you to encourage payment or obtain possession.

2.         Waiver of Forfeiture

Secondly, as a practical point, ensure that your accounts department or managing agents are alert to the fact that, by accepting part payment of invoices or selective payments of small invoices, they could be inadvertently waiving your right of forfeiture. Make sure that there are steps in place to account for this. 

3.         Section 17 Notices

With landlords, the key point in any arrears situation is not to ignore them.  This may sound obvious, but letting a tenant promise you that “the cheque’s in the post” can let matters drift significantly and may jeopardise your ability to fully take advantage of your remedies when serving section 17 notices. Section 17 notices need to be served on old guarantors. That is, any guarantor to an authorised guarantee agreement as soon as the tenant is in default and within six months of the payment becoming due.  If you have a choice of guarantors, carefully consider which one would be the better one to pursue as, once this guarantor is pursued, an overriding lease will be in place and you will be stuck with the guarantor as your direct tenant. 

4.         Utilising Distraint

When considering distress, the key is to make sure that the tenant owns the goods before you send the bailiffs in.  If the tenant has equipment on hire purchase, or that is leased and you are noticed of the same, then you will not be able to distrain against these goods. But, conversely, as a tenant if the landlord does distrain against goods that are not yours, make sure that your solicitor serves a counter-notice on the landlord within five days of a distress in order to get the goods back.  If you miss the five day deadline or do not serve the notice in a specific form, then the landlord can keep the goods and sell them on.  Tenants will be left with claims against them by the hire purchaser of the leasing company for the value of the goods.

Conclusion

The key to remember in the light of all the above points to note is that each factor has its own implications and that the most obvious remedy to tackle a problem is not always the best.  Step back, take an objective view of your considered route and remember to act quickly and decisively once you have established which remedy you want to pursue.

Gordons LLP regularly advises on commercial property law. If you wish to discuss the issues outlined in this article, or any issues around commercial property law, please contact Simon Mydlowski on 01274 202154 or e-mail: simon.mydlowski@gordonsllp.com.