Arrears Recovery

Question 1

Talk me through the process of a tenant not paying rent and how you would remedy this

Answer 1

1. Contact the tenant to ascertain why payment has not been made
2. Inspect the unit to see if tenant is still in occupation
3. Request full audited and managed accounts before recommendation
4. Options as follows;
   - Draw down on rent deposit
   - Pursue Guarantor (serve S17 L&T Covenants Act 1995)
   - Statutory Demand
   - Surrender/Forfeiture
   - CRAR
   - Payment Plan

Question 2

What if there is a Guarantor in place?

Answer 2

• Pursue guarantor under section 17 of the L&T covenants act 1995 within 6 months
• If guarantor clears arrears , they have a right to take over the overriding lease
• Replaced Privity of Contract

Question 3

What is CRAR? 

Answer 3

• Commercial Rent Arrears Recovery 
• Replaced ancient law of distress for rent 
• Introduced in 2014
• Available to commercial Landlords to recover rent (plus VAT and interest) 
• No minimum amount of arrears required 

Question 4

What are CRAR timelines?

Answer 4

• 7 days unpaid rent 
• 7 days notice 
• Enforcement Agent visits  
• 7 days before sale of any seized goods  

Question 5

What goods cannot be seized under CRAR? 

Answer 5

• Perishable goods
• Tools of the trade below the value of £1,350
• Any goods proved to belong to a third party 

Question 6

What are tenants’ rights under CRAR? 

Answer 6

• A commercial tenant does have the right to delay the enforcement action once they receive this notice. Do this by asking a court to either; grant a delay of execution; or set aside the enforcement notice.
• Where a commercial tenant faces the CRAR process, right to enter into a controlled goods agreement. Allows them to pay the rent arrears over a period of time. If they negotiate this, their goods must remain.

Question 7

What is a Statutory Demand?

Answer 7

• A preliminary step to pursuing bankruptcy/winding up procedures
• Advisable only when there is NO dispute about the level of arrear
• Can be seen to be and AGGRESSIVE Tactic
• Tenant has 21 days to pay the arrears
• Used for debts in excess of £750

Question 8

What is the Statutory demand process?

Answer 8

• Notice served and T has 21 days to pay or propose plan 
• After this time, LL can present winding up petition to Court  

Question 9

What is a surrender and when would it be used?

Answer 9

• Where L&T agrees to release the tenant from its obligations
• Does not have to be consideration - can be a nil premium
• Normally only done when LL is confident of reletting or wants to redevelop
• I.e. If another tenant, with a better covenant, is interested, offering a higher rent etc. a surrender may be best - it would be done on a mutual basis so surrender and new lease is done simultaneously, not to put the client at risk.

Question 10

What is a forfeiture and when would it be used?

Answer 10

• Aggressive tactic to take back possession of the property
• Check to make sure there is a forfeiture clause in the lease
• Rent must have been properly demanded or received
• Lease would be forfeited by the landlord entering the premises peaceably
• Tenant has the right to apply to the court for relief from forfeiture and this can be delayed by 6 months
• FORFEITURE FOR NON-PAYMENT OF RENT IS WALK IN POSSESSION (lease usually gives 21 days to pay rent before proceedings can commence)
• FORFEITURE FOR BREACH OF LEASE/REPAIRING OBLIGATION IS TO SERVE A SECTION 146 LoP 1925 NOTICE AND TENANT GETS 6 MONTHS.

Question 11

What are tenants rights under forfeiture? 

Answer 11

• Tenant has the right to apply for relief from forfeiture  
• Can only apply to Court as they are only one that can grant it  
• If they grant it, lease is restored as though forfeiture never happened  

Question 12

How can LL right to forfeit be waived? 

Answer 12

1. Demanding rent that is due in advance - implies LL is still treating lease as effective
2. Accepting rent after the landlord becomes aware of a breach or Negotiations can also have the effect of waiving the right to forfeit where those negotiations relate to the breach
3. If LL agrees payment plan with T 
4. If CRAR is exercised  
5. If S25 notice is served under LL & T Act 1954 

Question 13

How can lease be terminated by forfeiture? 

Answer 13

• Landlord can peacefully re-enter and change locks  
• Court proceedings can commence to  recover possession 

Question 14

Why is it important to look at management accounts as well as audited accounts? 

Answer 14

• The audited accounts might be a year or so out of date, because you submit these 9 months after year end 
• Management account shows how business is doing on monthly or quarterly basis 

Question 15

Two fundamental principles of rent collection? 

Answer 15

• Accuracy of information provided  
• Timing of when demands are sent out / rent is collected by 

Question 16

Typical lease terms regarding interest on late rent? 

Answer 16

2-4% above base rate 14 days after due date 

Question 17

How can Court proceedings be used to recover tenant arrears? 

Answer 17

• LL can obtain court judgement  
• High Court Enforcement Officer may then enforce this but need to pay court fees 
• Similar to CRAR 
• Can be useful if tenant is still solvent as threat of going to Court may prompt payment! 
• However - slower process, more expensive etc  

Question 18

What is key consideration when reviewing rent arrear recovery methods? 

Answer 18

• Chance of re-letting the property  
• Current passing rent vs market rent (market conditions) 
• Vacant possession value and void cost, vs value as let