Rent Rules - Debt Recovery Procedures for Non-Payment of Rent
In the current economic climate, landlords of commercial properties are increasingly finding that their tenants are not in a position to meet rental payments. This article gives some brief guidance on the remedies open to landlords of property in Scotland in these circumstances.
DEBT RECOVERY PROCEDURES
A landlord can take steps to recover outstanding rent in the same way as any creditor who is owed money and Court proceedings can be raised for recovery of outstanding rent. Depending on the amount due, the action will be a Small Claim (up to and including £3,000) a Summary Cause (over £3,000 and up to and including £5,000) or an Ordinary Action (over £5,000).
After obtaining a Decree (Judgement) for the sum due, there are a number of steps that can be taken to recover the outstanding rent, together with interest and Court expenses, if the debtor has not made payment.
Charge for payment
Sheriff Officers can be instructed to serve a Charge for Payment on the tenant. This is essentially a demand that the tenant pay the outstanding sums and we can usually arrange for service of a Charge for payment within a day or two of receiving instructions (depending on the debtor's location). If payment is not made, a number of further steps can be then taken, including petitioning for the tenant’s bankruptcy or, in the case of a limited company, liquidation. After serving the Charge, the Sheriff Officers will normally provide a report indicating whether there are prospects of recovering the outstanding sums by another means, for example, by attaching the tenant’s goods. A Charge for Payment normally has to be served before any further steps can be taken to recover the debt.
Another option would be to serve an arrestment on the tenant’s bank account(s). This has the effect of freezing the funds in the account(s) at the time of service of the arrestment and it prevents the tenant using those funds until the arrestment has been lifted. We recently arrested bank accounts on behalf of Landlord clients within hours of receiving their instructions and this has resulted in the tenant paying all the outstanding sums due to the Landlord.
Most funds or goods owned by the tenant and held by a third party can be caught by an arrestment.
If the tenant owns property, perhaps a dwelling house or commercial premises, an Inhibition can be lodged. An Inhibition is valid for 5 years and it prevents the debtor dealing with his property, for example by selling it or granting a Standard Security over it, until the Inhibition has been lifted. The landlord would not normally agree to lift the Inhibition until the tenant has paid the full sums outstanding.
If the Lease contains a clause giving consent to registration for execution (and most Leases do), the Lease can be registered and an Extract of the registered Lease will have the same effect as a Court Decree. In other words, the steps that can be taken to try and recover the outstanding sums on the basis of a Court Decree can also be taken based on an Extract of the Registered Lease. The sums due would have to be identifiable in terms of the lease. Rather than passing an Extract Decree to Sheriff Officers, an Extract of the registered Lease would be used. The benefit of this is that the landlord can act quickly to recover outstanding rent and avoid the time and expense involved in pursuing Court proceedings. We have used this method to great effect on behalf of a number of our clients.
The landlord’s hypothec is a longstanding remedy, which gives the landlord security over certain moveable property on leased land or in leased buildings. This right used to be enforced by raising an action for sequestration for rent. Sequestration for rent is no longer available, however, as it was abolished last year. The landlord’s hypothec has been restricted substantially by recent legislation and its effectiveness has been severely limited by the abolition of sequestration for rent, as this has removed the landlord’s means of enforcing the right.
In practice, this right will be of no use to the landlord unless if the tenant becomes insolvent. In that event, the landlord will be entitled to be paid out of the proceeds of sale of items covered by the hypothec in preference to other creditors.
The landlord’s hypothec gives a right in security for any rent that has not been paid by the due date, although it doesn’t cover future rent. The hypothec continues for as long as the rent remains unpaid.
If a tenant is in breach of any terms of the Lease, including provisions for payment of rent, it is open to the landlord to terminate the Lease early, and this is known as irritating the Lease. Most Leases have a provision covering irritancy. The landlord must give the tenant notice that he intends to bring the Lease to an end and the relevant provision often outlines the steps that have to be taken in order to irritate the Lease.
A landlord is entitled to take steps to recover outstanding rent after the tenant has left the property without having to enforce the tenant’s other obligations under the Lease. The Lease allows the landlord to recover possession of the premises, but it also crystallises the tenant’s liabilities. This is often no bad thing if the tenant is not able to pay the outstanding arrears, let alone meet future rental payments or other liabilities.
In the current financial climate, landlords are understandably not always keen to bring Leases to an end, given that it might be difficult to find a replacement tenant. We regularly advise clients on whether irritancy might be appropriate in their particular circumstances and take this step where it is in our clients’ interests to do so.
Guarantees can be another useful route open to a landlord. If the landlord has the benefit of a guarantee from a parent or group company, it is open to the landlord to enforce the guarantee against that company in respect of tenant’s breach.
It is worth mentioning that if the tenant company is in administration, the landlord will not be able to pursue recovery without the consent of the administrator. The administrator is unlikely to give consent and, although the landlord can apply to the Court for permission to take action, the Court will give the administrator an opportunity to be heard before reaching a decision.
If a landlord becomes aware that the tenant is having difficulty meeting rental payments, as with any other debt, it is best to act promptly in order to attempt to recover arrears before the situation gets any worse.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.