Enforcing lease covenantsForfeiture

In a difficult market, the landlord may not feel sufficiently confident about reletting the property to forfeit a defaulting tenant's lease. However, it must consider this option first because it is easy to waive the right to forfeit through the use of some methods of debt recovery.

Debt recovery

Court proceedings are generally slower and more costly than some of the alternative methods of debt recovery. If a landlord subsequently decides to discontinue its claim or if its claim is dismissed, it may have to pay the defendant debtor's costs.

The landlord must serve a claim form and particulars of claim on the tenant who then has either 14 or 28 days to serve a defence, depending on whether an acknowledgment of service is filed. If no defence is filed, the landlord may seek judgment in default, the hearing for which will normally be held within a few months. Alternatively, if it is a relatively simple matter and the defendant has no real prospect of successfully defending the claim, the landlord may be able to obtain summary judgment. Again, the hearing of an application should take place within a few months.

If neither judgment in default nor summary judgment is granted, the court will give directions governing the exchange of evidence in preparation for trial. This can arise where the debtor raises a counterclaim against the landlord that the court considers should be tried. Complying with directions takes time and can be costly, so before issuing proceedings landlords should consider whether the debtor has a potential counterclaim that could complicate the issue.

Obtaining a judgment is not the end of the story. Landlords will have to take steps and incur further costs to enforce a judgment. If the tenant has no income or assets to enforce against, there is little point in obtaining a judgment.

Using a rent deposit

A Landlord must ensure that it serves notice in accordance with the provisions of the deed and check:

• whether the rent deposit should be kept to cover the tenant's future liabilities, particularly those that may be more difficult to pursue than rent arrears, such as damages for dilapidations

• whether the deed allows the deposit to be used to settle the particular claim that it has against the tenant

Using a rent deposit to settle arrears is normally simple and results in an immediate release of cash. However, less money will be available to cover any future liabilities under the lease should the tenant fail to 'top up' the deposit. Unless that failure gives the landlord a right to forfeit, this route may not put the tenant under any real pressure to comply with its lease obligations.

Statutory demands

Serving a statutory demand is not in itself a method of debt recovery. It is a preliminary to pursuing bankruptcy or winding-up proceedings. It can, however, be an effective indirect method because it puts pressure on a tenant by raising the real possibility of bankruptcy (in the case of an individual) or liquidation (in the case of a company).

A statutory demand can be served only where the debtor owes at least £750 and the debt is liquidated and undisputed. If a landlord serves a statutory demand in respect of an unliquidated or disputed debt or a debt of less than £750, the debtor can apply for the statutory demand to be set aside and may recover its costs of doing so.

Before serving a demand, the landlord must consider any potential counterclaim, since this could also lead to the demand being set aside. Once a statutory demand has been served, the debtor has 21 days in which to settle the sum. After this period has passed, the landlord can present a bankruptcy or winding-up petition to the court. Depending on the tenant's financial position, this option may not be worth pursuing because the landlord will rank only as an unsecured creditor in any bankruptcy or liquidation.

In practice, the landlord will recover only a small percentage, if anything at all, of the original debt. Trustees in bankruptcy and liquidators are entitled to disclaim onerous property, including leases. In that event, the tenant's obligations under the lease will end and there may be insufficient assets to pay any claim by the landlord for the loss suffered as a result.

Former tenants

The landlord may be able to look to former tenants (or their guarantors) for payment of rent or service charge arrears. Their liability depends on the landlord serving notice under Landlord and Tenant (Covenants) Act 1995, s 17 within six months after the date on which the relevant sum becomes due.

A House of Lords ruling (Scottish & Newcastle v Raguz [2009] 1 All ER 763) removed the need to serve a s 17 notice, even where the current tenant was not in default, to preserve the landlord's ability to recover any uplift in rent that results from the operation of a rent review. Although rent is reviewed with effect from a specified date, the reviewed figure may not be settled for some months or years after that date. The Lords ruled that an uplift does not become due until it is quantified and may be recovered by action. A s 17 notice is required in respect of that uplift only if the current tenant fails to pay it on the next rent payment day after the amount is settled.

A new procedure

The Tribunals, Courts and Enforcement Act 2007 will abolish the law of distress for rent and replace it with a modified statutory procedure known as Commercial Rent Arrears Recovery ('CRAR').

Much like the old law of distress, CRAR is a 'self help' remedy and does not generally require the involvement of the courts. It is initiated by a landlord's instruction to ‘enforcement agents’ (the new name for bailiffs) to collect the rent or take control of goods. The court retains power to intervene if the tenant applies for an order to prevent any abuse of the process or a potential breach of the European Convention on Human Rights.

CRAR is available only to landlords of leases of commercial premises, and will not apply to residential or mixed-use premises.

What can be recovered?

'Rent' is narrowly defined. It includes only payments for 'possession and use of the demised premises' (including any interest and VAT on that amount). It does not include other sums such as rates, council tax and service charges even if they are defined or reserved as rent in the lease.

A landlord of commercial premises will be permitted to recover rent only if the net amount outstanding (excluding any interest, VAT and permitted deductions) exceeds a specified minimum. The Ministry of Justice has not yet fixed the minimum figure. The rent must have become due and payable before notice of enforcement is given. The amount must be certain, or capable of being calculated with certainty. The net amount must still exceed the statutory minimum at the time the enforcement agent takes control of the goods, so it is necessary for a landlord to recalculate the net unpaid amount immediately before seizing any goods.

The procedure

CRAR provides three methods for 'taking control of goods'

• by a controlled goods agreement (formerly 'walking possession')

• by securing goods on the premises or on a public highway, or

• by removal from the premises

The landlord must first serve 14 days’ written notice giving the tenant an opportunity to seek legal advice. The notice must contain information prescribed by Tribunals, Courts and Enforcement Act 2007. The landlord may dispense with notice only if there is a reasonable chance that the tenant may try and dispose of or relocate any goods. Before relying on this provision the landlord must be sure that he can produce objective evidence to satisfy the court. Seizure of goods must then take place within three months of service of the notice, but an application may be made to the court to extend this, up to a maximum limit of 12 months, if a good reason can be given.

Entry by the enforcement agent should be through normal methods of entry. Reasonable force is permitted, but only if ordered by the court and only as a last resort.

Tribunals, Courts and Enforcement Act 2007 also includes detailed provisions dealing with the storage, valuation and sale of goods, the distribution of sale proceeds, and the remedies available to landlords and tenants.

Although Tribunals, Courts and Enforcement Act 2007 is abolishing the law of distress, it preserves the landlord's ability to serve notice requiring a subtenant to pay the rent owed under the sublease directly to the landlord, rather than to the defaulting tenant, until the amount of arrears is settled.