If a commercial tenant breaches the terms of their lease, what steps can landlords take? Here, Beyond Corporate Law’s Holly Greensmith looks at the ways in which a tenant can breach their commercial lease and what remedies are available to landlords.
In the event a tenant breaches one or more of the terms of a commercial lease, a landlord has various remedies available, including:
- Forfeiture
- Specific performance
- Damages
- Self-help
- Injunctions
There are additional remedies available when the breach is as a result of non-payment of rent including:
- Drawing down a deposit
- Pursuing a guarantor or former tenant
- Court proceedings to recover the debt
- Commercial Rent Arrears Recovery (CRAR)
- Statutory demand and Insolvency proceedings
- Payment agreement
Which remedy will be best suited will depend on the specific breach and the ultimate goal of the landlord. The various options are detailed below.
Forfeiture
This is the right to terminate a lease where the tenant is in breach of any of its covenants or if a situation arises that has been specifically prohibited by the lease, for example insolvency.
This would be most suitable where the landlord believes that the could obtain a new tenant which would either be on similar terms or terms more beneficial to the landlord. However, it may be more beneficial to keep the current tenant in situ and pursue alternative remedies to rectify the breach and ensure compliance with the lease on an ongoing basis.
A landlord can waive the right to forfeit in some circumstances so it is important to ensure this has not taken place ahead of taking any action. .
Waiver of the right to forfeit occurs when the landlord, with knowledge of the tenant’s breach, performs an unequivocal act that recognises the lease as continuing to exist and communicates that act to the tenant. For example, accepting payment towards overdue rent may waive this right as it recognises the ongoing obligations under the lease and you may struggle to then argue the lease itself is forfeit.
If the right has not been waived, a landlord can commence the forfeiture process by serving a notice under Section 146 of the Law of Property Act 1925.
Service of Section 146 Notice
The process for this depends on whether or not the breach is remediable.
If the breach is capable of remedy then the notice must require the tenant to remedy the breach and to do so within a reasonable timeframe. If you fail to give the tenant a reasonable period of time to remedy the breach then the notice may be deemed invalid and could lead to a claim for unlawful forfeiture.
For breaches related to non-payment of rent, there is no requirement to serve a Section 146 Notice prior to forfeiture.
Additional Requirements for Breach of a Covenant to Repair
Section 1 of the Leasehold Property (Repairs) Act 1938 (LPRA 1938) applies if the lease was granted for a term of at least seven years and has at least three years left to run and limits the landlord’s ability to forfeit the lease where the LPRA 1938 applies.
The landlord’s Section 146 notice must refer to the tenant’s rights under the LPRA 1938. If the tenant claims the benefit of the LPRA 1938, the landlord cannot take steps to forfeit the lease or claim damages for breach of the repair covenant without the consent of the court.
Post forfeiture
If forfeiture is successful, the landlord will need to deal any items left at the property or may be faced with an application for relief from forfeiture.
Goods left in the property
The general position for fixtures is where the lease is forfeited by peaceable re-entry, the tenant’s right to remove any fixtures is lost, unless the lease specifies otherwise.
For personal property the landlord will likely have to become an involuntary bailee, whereby they are in possession of the goods belonging to another. In these instances the landlord should give the ex-tenant the opportunity to collect these goods by serving notice on him under the Torts (Interference with Goods) Act 1977.
Registration and Fees
If the lease is registered at the Land Registry, the landlord may need to take steps to close the leasehold title and remove any associated entries relating to the lease from superior titles.
Where a landlord forfeits the lease, the landlord will once more become responsible for paying rates (subject to any reliefs that may be available), as the person entitled to possession.
Relief from Forfeiture
A tenant may apply for relief from forfeiture or an application can also be made by an undertenant or mortgagee.
The landlord may decide to notify those who have a right to apply for relief, indicating that a new lease will be granted and requesting that they apply for relief immediately if they intend to do so.
Specific Performance
This action is suitable where there is a dispute over whether there is a breach and what action is therefore required. The landlord can apply to the court to ask the court to declare whether or not there is a breach and how to rectify the same.
It is an equitable remedy which is a type of court ordered relief awarded when other legal remedies, such as ordering damages, would be inadequate.
This could also be combined with a court application for specific performance, requesting that the tenant comply with its covenants, or a damages claim to compensate the landlord for the tenant’s breaches.
Damages
It is possible for a landlord to bring a claim for damages in relation to a breach of the lease so that they are put back in the position they would have been if the tenant complied with the lease.
To get compensation for loss suffered due to the tenant’s breach, the landlord must prove their loss and establish that it was caused by the tenant’s breach. If the link between the breach and the loss is too remote, the claim will likely fail.
Depending on the nature of the tenant’s breach and other circumstances, damages alone may not be an adequate remedy.
Self-help for Breach of Repair Covenants
The amount of damages a landlord can recover as a result of a tenants breach of repair covenant is limited by statute.
In some instances, landlords may enter the property and carry out the works themselves if the lease provides for this (known as a “Jervis v Harris” clause). The costs of the repair works are then treated as a debt and the landlord can pursue recovery of the same, providing the works done were specific to breached repair covenants.
Injunctions
An injunction is a court order requiring a party to either taken action or refrain from further specific action. This is an equitable relief and may be considered where damages alone would not suffice.
In appropriate cases, where an urgent remedy is required, for example to cease unauthorised works, the landlord may apply for an interim injunction in the first instance, to be followed by a final injunction at a later stage.
The court must consider whether there is a serious issue to be tried, whether damages would be an adequate remedy, and where the balance of convenience lies (e.g., the inconvenience if the injunction is granted compared to the inconvenience if it is not).
An injunction is a costly and time-consuming process that should only be considered where there is an urgent need for immediate action.
Specific remedies following non-payment of rent
Using the deposit
A commercial landlord may be able to draw down from a rent deposit to recover rent arrears or other sums due under the lease.
It is important to note that a draw down may waive the right to forfeit and so if there are other methods to recover the debt and the landlord does wish to forfeit the lease, these other options should be considered first.
Pursuing a guarantor
The landlord may be able to recover rent arrears from any guarantors under the lease by way of a contractual guarantee.
It is also possible to pursue sums from a former tenant or former guarantor by way of service of a Section 17 Landlord and Tenant (Covenants) Act 1995 (“LTCA”) Notice. This notice must be served within 6 months of the debt falling due.
If a landlord fails to serve the Section 17 Notice within the 6-month period, the former tenant (or former guarantor) is no longer liable for the debt.
If a party receives a Section 17 notice and then makes payment in full, it has a right under section 19 of LTCA call for an ‘overriding lease’ – in effect becoming the landlord’s direct tenant. It is therefore important to consider whether the landlord would be happy with that entity as a potential tenant.
County Court Proceedings
A landlord can issue court proceedings against the tenant to recover rent or other sums due under the lease. In the first instance the landlord is required to send a Pre-Action Protocol compliant Letter of Claim/Letter Before Action ahead of issuing any proceedings.
In some instances, the tenant will have no defence, and summary judgment could potentially be obtained and the usual means of enforcing a judgment debt are then available, such as sending in bailiffs. This may be useful if you wish to put pressure on the tenant to pay without losing the tenant.
In other instances, such as where tenants defend the claim, court proceedings can become drawn out and costs can mount quickly.
Sometimes the threat of proceedings alone are enough to bring the tenant to the table and an LBA can therefore be a way of reaching a resolution in a relatively fast and cheap manner in comparison to proceedings themselves.
Commercial Rent Arrears Recovery (CRAR)
CRAR is a method of enforcement and can be used to recover principal rent arrears. This process allows for an enforcement agent to enter the property (after giving 7 days notice) and take control of goods to the value of the debt.
If any of the arrears relate to service charges, insurance rent, or other sums due under the lease, CRAR cannot be used to recover them.
Statutory Demand/Insolvency Proceedings
Where the tenant has failed to pay rent or other sums due under the lease, the landlord may wish to consider commencing insolvency proceedings. Where there is no dispute as to the amount of the debt, the landlord could consider serving a statutory demand on the tenant of the debt is higher than £750 (£5,000 for non-commercial tenants). If this remains unpaid after 28 days then this may be deemed evidence of inability to pay a debt and therefore gives grounds to present a winding up petition.
Payment Agreement
A payment agreement requiring the tenant to pay arrears in instalments might be considered, depending on the circumstances.
Contact us
If you would like to seek any legal advice in relation to issues with your commercial tenant, please speak with the dispute resolution team at [email protected].
