Rent recovery

The binding arbitration process to deal with lockdown rent arrears in England and Wales introduced by the Commercial Rent (Coronavirus) Act 2022 has now closed to new referrals. Where no arbitration has been commenced, landlords of commercial premises can now use any of the old methods of enforcement to recover rent arrears. In this respect at least, the ‘new normal’ is remarkably similar to the ‘old normal’.

Forfeiture

Landlords can (in nearly all cases) terminate leases for non-payment of rent through forfeiture. The lease itself must contain a re-entry clause and the landlord must not have demanded rent. Forfeiture can be effected either by simply changing the locks (known as peaceable re-entry) or by the issue and service of court proceedings. For non-payment of rent, there is no need to give the tenant any prior notice before exercising this right, although leases typically give the tenant a short grace period before a landlord can forfeit. For anything other than non-payment such as disrepair, formal statutory notice is required before the process can be pursued.

It is important to remember that a tenant will be able to apply to the court for ‘relief from forfeiture’ – essentially asking for its lease to be reinstated. If the tenant pays the rent arrears and the landlord’s costs of the forfeiture then it will likely (and in some cases automatically) be given relief and the lease will continue as if never terminated.

Forfeiture can therefore be a very effective way of achieving recovery of rent arrears. If peaceable re-entry is adopted, being locked out of its premises provides a strong incentive for a tenant to make a payment and a relief application.

However, it is not suitable in all cases. Most obviously this is the case if the landlord does not wish to recover possession of the property. Landlords also need to be sure that the right to forfeit has properly arisen and that they haven’t waived the right by continuing to acknowledge the lease (which can be done inadvertently). Changing the locks where there is no right to do so will expose landlords to a claim for wrongful forfeiture and there are strict requirements on changing the locks that carry criminal sanctions if breached. 

Insolvency

Landlords with an undisputed debt above certain thresholds can apply to the court to place tenants into insolvency – bankruptcy in the case of an individual and a compulsory winding-up in the case of a company. In the former case, a statutory demand must first be served giving a tenant 21 days to pay. In the latter, while there is no requirement to provide any prior notice, it is generally advisable to send a letter threatening winding-up if payment is not made within a specified time.

The threat of an insolvency can be a strong incentive to pay. The mere presentation of a winding-up or bankruptcy petition will have significant repercussions for a tenant and they will generally want to avoid those if at all possible.

The major drawback of this method is that it is ultimately a joint remedy for all creditors. Once a petition has been issued and advertised in the Gazette, the matter will, to a certain extent, be out of the landlord’s hands. Other creditors may join in on the petition. If the tenant is wound up or declared bankrupt then its assets will be split between creditors and, in many cases, full recovery for the landlord will be unlikely.

The tenant may also dispute the sums. For example, in the case of leases involving turnover rent or the debt includes sums such as service charges where calculations and recalibrations are required, these may not strictly be undisputed sums and a tenant may defend the winding-up petition. In which case, the tenant may seek injunctive relief to restrict issuing the petition or advertising it. The threshold for such an injunction is not high – it is not a summary judgment threshold. The winding-up could also be defended and end up in debt proceedings, with further winding-up hearings relisted numerous times and the process becoming costly and protracted.

Debt recovery proceedings (CCJ)

This involves issuing a money claim in the courts. If successful, a landlord would be able to adopt one of the methods of enforcing a court judgment, which are more extensive than those set out here.

This method can be appropriate if a tenant has a valuable property over which a landlord could obtain a charging order or valuable goods at other premises that could be seized. In the case of payment of rent, which is a contractual obligation to pay under the lease, the claimant landlord can avail itself of the summary judgment/strike out procedure shortly after issuing court proceedings, leading to a hearing of the case without the need for a formal trial. 

However, this process should not be followed where there is a genuine dispute raised by the tenant and, where a case is defended, it can take 12–18 months to reach trial. It will take even longer to enforce that judgment and during that period there may be little incentive for the tenant to pay. 

Commercial rent arrears recovery (‘CRAR’)

CRAR involves instructing licenced enforcement agents to take possession of items present in the tenant’s demised property to cover the cost of unpaid principal rent (and not service charge or other sums due).

This can be a relatively simple enforcement method if the tenant has valuable goods at the premises. However, there is a strict procedure which must be followed, including providing at least seven days’ notice and requirements for the sale process. There are also extensive exceptions to the goods that can be seized.

Rent deposits

If a landlord has a rent deposit then it may be able to draw down on this to cover the arrears, a quick and easy method, and tenants are usually required to top-up a depleted deposit. However, landlords may often be better advised to keep the rent deposit in place so that it can be used for other breaches (such as future arrears or dilapidations).

Guarantors

A landlord can pursue any guarantor for the arrears – either a guarantor under the lease or former tenants who have given an Authorised Guarantee Agreement (or, in a pre-1 January 1996 lease, are bound by privity of contract).

This can be an effective enforcement mechanism if a guarantor or former tenant has a stronger financial covenant than the tenant itself. Landlords should be aware that if pursuing a former tenant, a notice must be served within six months of the arrears becoming due and the former tenant can obtain an overriding lease of the premises if the arrears are paid. 

Negotiations

Remember that in some circumstances a negotiated solution – such as a payment plan or lease re-gear – may provide a better solution for all parties. These negotiations can, of course, be run on a without prejudice basis in parallel with one of the enforcement methods described above.

Where a landlord is contemplating enforcement action by court proceedings, it is worth considering making suitable offers of settlement at the pre-action stage, both to minimise costs awards if the matter runs to trial or judgment and to demonstrate to the court ‘reasonableness’ in trying to prevent the case from reaching that point. Well-timed and properly compromised offers of settlement can also apply pressure to an opponent to settle; and well-pitched offers made under Part 36 of the Civil Procedure Rules can result in significant benefits both in terms of costs recovery and an uplift on damages awards. 

Alternative procedures

Arbitration, expert determination and mediation are perhaps the most well-known forms of alternative dispute resolution (ADR). Arbitration is a procedure where the parties to a dispute refer their dispute to an arbitrator (this can be more than one) to make a binding decision. It can be done on papers alone or with an oral hearing and is governed by the Arbitration Act 1996. Decisions are enforceable generally internationally. In expert determination, the parties refer their dispute to a suitably qualified expert to make a decision. There is no hearing and no statutory procedure governing it. It is generally cheaper and much quicker than arbitration. 

Mediation involves the parties instructing a specialist mediator to mediate between them at a meeting typically over one day, to explore the issues and see if a negotiated compromise could result in a settlement agreement at the meeting. Even if resolution is not found on the day, it is often a well-utilised form of ADR to help the parties narrow the dispute between them. It is generally used by parties in cowntemplation of litigation as well as when court proceedings have been issued, but not always. 

Importantly, both processes are consensual by the parties (unless the lease permits otherwise) and are private and confidential between them (unless agreed otherwise) meaning an entirely private process in, for example, commercially sensitive claims. They are also usually a quicker alternative to court proceedings, but not necessarily cheaper. Specialist property disputes arbitrators and experts should be utilised. 

Where agreement is reached but a party fails to comply, court proceedings are likely to be required for enforcement. If you are uneasy about the other party’s ability to pay or comply with any agreement reached, you may waste money utilising informal ADR where a formal court process would likely have resulted in any event.