There are a number of ways that a Landlord can attempt to recover unpaid rent from a tenant. Which one a landlord chooses to use depends on a number of circumstances-some are faster or cheaper than others, but some are more effective. This note is intended to help landlords understand the range of options open to them, how fast each method is, how expensive each is, and what the consequences will be.
If you have any queries arising from this note, please contact either Ian Torr or David Vaughan-Birch who would be happy to discuss it with you.
Forfeiture by peaceable re-entry
Provided the lease allows it (and it is highly unusual for a modern lease not to) it is possible for a Landlord to bring a lease to an end by physically entering onto the leased property. This is usually undertaken by High Court Enforcement Officers who will then go on to distrain on any of the tenant’s property on the premises.
Very quick provided no application for relief made.
The lease is terminated, so the tenant is then only liable for the arrears of rent up to the date of re-entry. The tenant will be liable for any breaches of covenant apart from the arrears such as repairing covenants however. It is possible for a tenant to apply to the Court for “relief from forfeiture” provided they act quickly enough-the Court will normally grant relief, which will re-instate the lease, subject to conditions. Those conditions will include payment of the arrears and payment of the Landlord’s reasonable costs. The Courts have expressed disapproval of this self-help method in the past, and if a Landlord has behaved “unreasonably” (for instance if the Landlord has not responded to a tenant’s reasonable request for time to pay or is in breach of his own obligations under the lease) the Court may not allow the Landlord his costs. If no application is made the Landlord is free to re-let the property under a new lease.
The Landlord will not be able to look to the tenant for any rent during this period however so it is important to be sure that the property can be let quickly. Any guarantors will also be released on forfeiture. A possible alternative if there is a guarantor is to agree a surrender of the lease on terms (for instance a capitalised sum representing the guarantor’s liability for the ongoing rent).
The High Court Enforcement Office charges a flat fee for attendance of approximately £1,000.
The HCEO enters onto the tenant’s property and take away goods to be sold to satisfy unpaid rent. If the tenant is present the bailiff may agree to take “walking possession”, where the tenant agrees that he will not dispose of the goods for an agreed period during which time he will discharge the arrears and the landlord’s costs.
Associated with peaceable re-entry, as the HCEO entering onto the premises will also be an act that forfeits the lease. To be cost-effective the tenant must have goods belonging to him on the premises that can be sold. It is therefore most effectively used if the tenant is asset-rich for instance is running a bar or restaurant or is a manufacturer of goods.
The bailiff’s costs will be paid by the tenant assuming he has goods of sufficient value to discharge them. If not the Landlord will be liable for the costs, which are calculated on a sliding scale depending on the amount of the arrears. As a minimum the costs will be of the order of £1,000.
Forfeiture by proceedings
A claim is issued at the County Court for breach of covenant (ie non-payment of the rent). The tenant has the opportunity to defend the claim and apply for relief from forfeiture. If the tenant does not defend, the Landlord will be able to apply for a judgment in default (see below) and then, following a hearing, an order forfeiting the lease.
At least 28 days to the point of being able to apply for summary judgment. May be several months to final hearing.
This is the method preferred by the Court (see peaceable re-entry above). A debt judgment can be enforced against a tenant (see below) without forfeiting the lease, which (if paid) preserves the lease and all the obligations it imposes. The Landlord therefore has more control over the consequences than in peaceable re-entry. However it is not possible to apply for summary judgment (see below).
The Court fee to issue the proceedings will be £285. If a defence is filed there will be an allocation fee to pay and also (if there is a final hearing) a listing fee. Solicitors’ costs depend on the amount of work that is done but of the order of £1,500 for a “normal” claim. These costs can be recovered from the tenant if he or she has the funds to pay them.
Service of a statutory demand followed by a bankruptcy or winding up petition. Both must be served personally on the tenant himself or at the registered office (if a limited company). The petition must be issued out of the tenant’s local insolvency Court.
If the tenant is made bankrupt or wound up the Landlord may choose to regard this as an act which forfeits the lease. However the trustee in bankruptcy/official receiver can apply for relief, or alternatively disclaim the lease (ie bring the lease to an end). The trustee in bankruptcy/official receiver will realise the assets of the tenant, and then pay the tenant’s creditors on a pro rata basis. The Landlord will be an unsecured Creditor and recovery is dependent on the tenant having sufficient assets for the insolvency to be commercially viable.
Court fees and process servers are approximately £1,000, legal costs similar. These will be repaid out of the insolvent estate if it is able to do so.
Enforcement of judgment debt
A simple debt claim can be made in proceedings brought against a tenant in arrears rather than a claim for forfeiture. There may be good tactical reasons for doing so; the lease will not be forfeited;
- The proceedings can be issued on-line saving time and money;
- Summary judgment can be applied for if within 28 days of issue if no defence is filed;
- A judgment can be enforced in numerous ways, for instance against an individual’s or a company’s bank account, or secured on property by charging order.
A judgment debt will affect a tenant’s credit rating-the threat of this may be sufficient to force payment.
The Court fee to issue the proceedings depend on the amount claimed. If a defence is filed there will be an allocation fee to pay and also (if there is a final hearing) a listing fee. Solicitors’ costs depend on the amount of work that is done but of the order of £1,000 for a “normal” claim to summary judgment stage. These costs can be recovered from the tenant if he or she has the funds to pay them.
Liability of original tenants and assignors
Old tenancies (granted before 31 December 1995)
The Landlord and Tenant (Covenants) Act 1995 will not apply. The original tenant will be liable for the rent and any other breaches of covenant. Normally any licence to assign will also contain a covenant to comply with the terms of the lease in which case all assignees will also be liable.
New tenancies (granted after 31 December 1995)
The Landlord and Tenant (Covenants) Act 1995 will apply, which restricts liability for arrears of rent and other breaches of the lease to:
- the current tenant;
- their guarantor if any;
- the assignor to the current tenant (if there is an Authorised Guarantee Agreement);
- any guarantor of such an assignee.
The effect of the Act is to release tenants from their obligations on assignment, unless the assignment is in breach of covenant.
The Landlord can require an outgoing tenant to enter into an Authorised Guarantee Agreement, which gives some security to the landlord but also limits the old tenant’s liability if the new tenant defaults. It also entitles the old tenant to enter into an over-riding lease if the tenant defaults-ie the old tenant takes possession once again.
If the landlord wishes to recover rent arrears from an old tenant, there are strict time limits. The Landlord must inform a former tenant of a liability having arisen by formal notice within 6 months (eg of a rent demand being unpaid).