Non-payment of rent

Non-payment of rent

Proceedings against the tenant

The type of legal proceedings for recovery of rent arrears available to a landlord will depend on whether the lease is in respect of a residential or commercial property.

The choice of proceedings will also depend on what the landlord wants to achieve. Where the most important issue for the landlord is to recover the rent without having to find a new tenant, the best option might be to negotiate a payment arrangement with the tenant. Another alternative might be to draw down the arrears from a rent deposit where the terms of the lease and deposit agreement allows for that and the possible insolvency of the tenant doesn't prevent that.

Court proceedings for recovery of the rent is another option. However, if the main objective of the landlord is to get the property back so that a new and more reliable tenant can be found, then an application for forfeiture might be best.

A landlord should however always take legal advice before taking any action against a tenant as there are many legal traps that the landlord can unwittingly fall into which could result in the landlord finding themselves on the wrong side of the law or inadvertently waiving their rights of action against the tenant.

Demand for rent

An initial letter to remind the tenant that payment of the rent arrears is required to avoid further action would be the usual starting point to recover unpaid rent. This letter would set out how the arrears are calculated. It would also require, within a limited number of days, either full payment of the arrears or for arrangements to be made to pay off the arrears while keeping up the ongoing rentals as they fall due.

It is important for the landlord to also make clear in this letter that they reserve their right to take any legal action available to them for recovery of any arrear rentals and possession of the property should the tenant not comply with the demands made in the letter. This is needed to make sure that no rights of recovery or repossession of the property can be regarded as having been waived.

A letter of this nature often has the effect of causing the tenant to make payment of the arrears to avoid more serious legal action.

Court action

The landlord may commence court action against the tenant for recovery of rent.

Judgment for payment of arrears of rent of up to 6 years can be obtained through a civil court action and that judgment can be enforced in the most appropriate way as discussed above.

Bankruptcy and winding-up

If the tenant is an individual and the sum owed to the landlord is £5,000 or more, the landlord may consider serving a statutory demand on the tenant with a view to commencing bankruptcy proceedings against them. A statutory demand often brings the tenant to pay the outstanding rent within the allowed time of 21 days to avoid possible bankruptcy proceedings. A statutory demand that remains unpaid after 21 days provides sufficient proof that the debtor is unable to pay its debts for purposes of bankruptcy proceedings.

If the tenant is a company and the sum owed is more than £750 the landlord could serve a statutory demand to show that the company is unable to pay its debts and if so proceed with liquidation proceedings against the company.

However, the landlord has to bear in mind that the bankruptcy or liquidation of the tenant may reduce the chance of them getting paid in full since the landlord will become an ordinary unsecured creditor on the bankruptcy or liquidation of the tenant.

Forfeiture

Forfeiture for arrears of rent in respect of commercial property

If a tenant breaches a covenant under the tenancy the landlord may have the right to re-enter the property to end the tenancy. This is known as forfeiture. When forfeiting a tenancy, the landlord can either issue proceedings for recovery of possession or peacefully re-enter the premises.

Before forfeiture by re-entry can take place on the grounds that the tenant is in arrears with rent, the landlord has to make sure that the right to forfeit the lease has arisen under the terms of the lease agreement.

To be legal, a peaceable re-entry must take place without the objection of any person present on the property and without excessive force. To be regarded as a re-entry there must be a physical entry onto the property.

Once forfeiture by re-entry has taken place a notice must be placed on the property informing that forfeiture by re-entry has taken place

The tenant may apply to court for relief from forfeiture

If the forfeiture is proceeded with by way of Country Court proceedings the tenant can obtain automatic relief by paying the full outstanding rent, interest and costs into court at least 5 clear days before the first hearing of the forfeiture proceedings. The lease will be re-instated with retrospective effect as the landlord's claim will be extinguished.

The tenant also has a second chance to get automatic relief because at the first hearing the court will order possession usually for a date about 4 weeks into the future. If the tenant pays the full outstanding debt, interest and costs into court by that date they will gain automatic relief with re-instatement of the lease.

If the tenant doesn't make use of these opportunities to get automatic relief by making payment, they will still be able to get relief within 6 months after the landlord has recovered possession by applying to court and making payment into court of the full outstanding debt, interest and costs. The court will however have to be satisfied that the tenant will not breach the terms of the lease again in future.

If the forfeiture is proceeded with by way of High Court proceedings it will deal in a summary way with an application by the tenant for relief if the tenant pays the full outstanding rent, interest and costs into court. The tenant also has the same opportunity to gain relief by paying the full outstanding amount plus interest and costs into court, either before the first hearing or within 6 months of execution of the possession order where at least 6 months' rent is in arrears. Where there is less than 6 months' rent in arrears, the 6-month limit prescribed by section 210 of the Common Law Procedure Act 1852 will be taken as a guide rather than a strict time-limit

If forfeiture proceeded by way of peaceable re-entry the tenant can also get relief by applying to the county court or High Court for relief and making payment into court of the full outstanding debt, interest and costs.

The court will grant the relief usually on condition that the tenant pays the arrears of rent.

The court will, as a rule, grant the relief from forfeiture where the tenant has made this payment. The court will not take any other complaints, over and above the arrear rent issue, into consideration when deciding whether to grant forfeiture relief. The court will however refuse relief if another party has gained rights in respect of the property without being aware of the forfeiture situation.

It is possible for a landlord to waive their right of forfeiture. This will occur if the landlord, knowing of the breach, performs an act that recognises the continued existence of the tenancy.

For example, if a landlord still demands rent after the right to forfeit has arisen this will amount to a waiver. The reason for this is that the act of demanding rent recognises that the tenancy is continuing even after the breach has occurred. However, if the breach itself then continues, the right to forfeit, though waived on one occasion, will arise again.

Landlords should always get legal advice on their options in taking forfeiture action because it carries significant risks. For example, if not done properly, forfeiture can expose a landlord to a significant damages claim by the tenant.

Commercial rent arrears recovery

Commercial rent arrears recovery (CRAR) applies to any commercial premises let using a written lease. A property will be regarded as commercial premises if it is not let under the main lease or an inferior lease as a dwelling or occupied as a dwelling. CRAR does not apply to premises partly let for commercial purposes and party for residential purposes (mixed-use), unless the use as a dwelling is not authorised under the main lease.

This legal procedure replaced the landlord's common law remedy of distress. The common law right of distress allowed landlords to take and sell certain goods of the tenant found on the premises. Under CRAR this common law right to distress was abolished and replaced by new powers of enforcement by taking and selling goods but the difference is that these powers now have to be enforced through the use of authorised enforcement agents.

By using CRAR the landlord will lose the right to forfeit the lease and on the other hand once the lease has been forfeited CRAR is no longer available to the landlord.

CRAR can only be used before the lease has ended except in respect of rent due and payable before the lease ended if all of the following conditions can be met:

  • the lease didn't end by forfeiture;
  • no more than 6 months must have lapsed since the end of the lease (or any statutory continuation of it or continuation by operation of another law)
  • the rent was due from the person who was the tenant at the end of the lease and that person is still in possession of any part of the premises;
  • any new lease under which that person remains in possession is a lease of commercial premises; and
  • the person who was the landlord at the end of the lease remains entitled to the return of possession of the premises

The landlord must instruct an enforcement agent in writing to carry out the recovery once a minimum of 7 days' 'net rent' remains unpaid. The net rent means the actual rent less any VAT, interest and payments the tenant can set-off against the rent. It doesn't include payments such as insurance premiums and service charges even if the lease says they are included as part of the 'rent'.

The instruction, signed by the landlord, to the enforcement agent must include the following information:

  • the date of authorisation;
  • the landlord's name and contact details;
  • the name and contact details of the person authorised to act on behalf of the landlord;
  • sufficient detail to enable the authorised person to identify the commercial premises in respect of which CRAR may now be exercised on the landlord's behalf;
  • the amount of rent owed; and
  • the period in relation to which the rent is owed.

The enforcement agent must then give the tenant 7 'clear days' notice of their intention to take control of the tenant's property to the value of the rent arrears and any VAT, interest and costs. Clear days don't include Sundays and Bank holidays and also exclude the date of notice and the date when control will be taken. This notice to the debtor must be in writing and must contain the following information:

  • the name and address of the debtor;
  • the reference number or numbers;
  • the date of notice;
  • details of the court judgment or order or enforcement power by virtue of which the debt is enforceable against the debtor;
  • sufficient details of the debt to enable the debtor to identify the debt correctly;
  • the amount of the debt including any interest due as at the date of the notice;
  • the amount of any enforcement costs incurred up to the date of notice;
  • the possible additional costs of enforcement if the sum outstanding should remain unpaid by the date and time stated to avoid the goods being taken and sold;
  • how and between which hours and on which days payment of the sum outstanding may be made;
  • a contact telephone number and address at which, and the days on which and the hours between which, the enforcement agent or the enforcement agent's office may be contacted; and
  • the date and time by which the sum outstanding must be paid to prevent goods of the debtor being taken control of and sold and the debtor incurring additional costs.

Within 12 months of giving this notice, and so long as the minimum net rent remains unpaid, the enforcement agent can take control of the tenant's property. The enforcement agent can only take control of the goods on any day of the week between the hours of 6am and 9pm and during hours outside of those hours if the commercial premises are open for trading. The enforcement agent may only gain entry or re-entry though a door or any other usual means of gaining entry to the premises. Only in limited circumstances can the enforcement agent apply to court for permission to use reasonable force to enter premises.

An enforcement agent can take control of goods by securing the goods on the premises, entering into a written controlled goods agreement with the tenant not to remove the goods from the premises or removing them.

After entering the premises, the enforcement agent must give the debtor a notice explaining what they are doing there. Once the enforcement agent has taken control of goods they have to provide the debtor (and any co-owner) with an inventory of the goods taken control of and a copy of any controlled goods agreement. Any co-owner must also be given a copy of the notice. The inventory must contain the following information:

  • the name and address of the debtor;
  • the enforcement agent's name, the reference number or numbers and the date of the inventory;
  • the name and address of the co-owner, if any;
  • that the enforcement agent has taken control of the goods of the debtor or of the debtor and the co-owner as specified in the inventory; and
  • a list of the goods of which control has been taken with a description to enable the debtor or the co-owner to identify the goods correctly, including, where applicable; the manufacturer, model and serial number of the goods; in the case of a vehicle, the manufacturer, model, colour and registration mark of the vehicle; and the material, colour and usage, and (where appropriate) any other identifying characteristic, of the goods.

Certain goods on the premises cannot be secured/removed e.g. necessary equipment personally used by the tenant for their employment, trade, business, profession or for education up to the value of £1,350.

Once control is taken, the enforcement agent must usually wait 7 clear days before selling them. The enforcement agent must however also within that 7 days make or obtain a valuation of the goods. The valuation must be in writing and must give a separate value for each item taken control of. A copy of the valuation must be given to the debtor and any co-owner.

Before selling the goods the enforcement agent must give the debtor and any co-owner at least 7 days' notice of the date and time of the sale together with information that will enable the debtor to identify the goods being sold and the amount of the outstanding debt to be covered by the sale. If the goods will be unsellable or if their value will be lost or substantially reduced if 7 clear days' notice is given, then they can be sold on the day after they have been secured. The goods have to be sold by public auction. Even at this late stage the debtor can avoid the sale of the goods if full payment of the outstanding amount is made.

Once the goods have been sold the proceeds will be used to pay the outstanding debt and the recoverable costs of the CRAR recovery proceedings. However, if there is a co-owner they are to be paid their full share in the interest of the asset before any distribution can take place. If the proceeds are more than is needed to cover the debt and recoverable costs, the balance will be paid to the owner debtor.

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