Myai Duong asked:


Landlord’s remedies

Imminent changes to the law are about to be made which will impact on a landlord when faced with tenant insolvency. The primary concerns of a landlord will be dealing with any rent arrears in the short term and the premises in the more medium to long term.

Distress

When dealing with arrears, distress should be attempted first. Distress is the seizing of a tenant’s goods in lieu of rent arrears. If there are insufficient goods, then court proceedings should be issued. Court proceedings are only an option if the monies due are certain. There are increasing hurdles facing landlords as a result of recent and proposed changes in the law. The introduction of the Insolvency Act 2000 and the Enterprise Act 2002 means that directors of insolvent companies have greater powers to rescue their troubled companies. In the current climate, Administration appears to be (and looks likely to continue to be) the favoured option for these directors.

Administration is applicable where a company is in severe trouble but still has some hope of recovery. Administration will involve the company being put into the charge of a court-appointed administrator. The practical effect of going into administration is that it cannot be wound up without the court’s permission.

A landlord may find it difficult to take action against a defaulting tenant in administration because the permission of the Court (and the administrator) is required before distrain of rent can be exercised or proceedings issued.

Given that the objective of an administration is to rescue the company, it is highly improbable that the Court or an administrator would grant permission to the landlord to distrain for rent or issue proceedings.

Furthermore, Part 3 of the Tribunals, Courts and Enforcement Act 2007 (which received Royal Assent on the 19th July 2007) will make it more difficult for landlords to recover arrears. The existing remedy of distress will be abolished and replaced by the new commercial rent arrears recovery (CRAR) procedure.

The CRAR requires an enforcement notice to be served on the tenant, who must be in arrears before the service of the notice, and the overdue rent must exceed a certain amount (limit has not yet been decided) before goods can be seized by the landlord. In addition, the landlord is not able to exercise this remedy itself but must appoint a certified enforcement agent.

The CRAR will result in an erosion of the “element of surprise”. The enforcement notice is likely to prompt dishonest tenants to seek to move goods from the premises and out of the landlord’s reach. Landlords can take some comfort from the fact that they are, in principle, able to pursue the goods to the new location. However, the time and cost in so doing is likely to make it an unattractive option.

It remains to be seen whether the overhaul of the process of enforcement by way of seizure and sale of goods will, in practice, be a benefit to commercial landlords or, whether it will simply hinder their attempts to recover arrears from defaulting tenants.

The CRAR is not yet in force and no commencement date has been set.

Forfeiture/Surrender

Where a landlord is faced with an insolvent tenant, it may be an attractive prospect for a (in the medium to long term) to forfeit the lease and recover possession.

In a depressed market, where the property is over-rented, tenants and sub-tenants are likely to want to quit the premises but landlords are unlikely to want to take possession. In a buoyant market, where rents are rising, the insolvency of a tenant may present an opportunity to obtain vacant possession in order to re-let at a higher rent or redevelop the site.

As with rent arrears, landlords face a number of hurdles. If the defaulting tenant is in administration, the consent of the Court and the administrator will be necessary before a lease can be forfeited and, as with rent arrears, this can be extremely difficult in the early stages of administration.

The proposed changes to the law of forfeiture would mean tougher times for landlords.

Forfeiture by peaceable re-entry will no longer be permitted and default notices will need to be served in respect of all tenant breaches. Following service of such a notice, the landlord may apply to the Court to have the tenancy terminated.

However, Landlords should not panic just yet. The proposed changes to the forfeiture procedure are not high on the agenda of the powers that be and consequently, may be a long way from becoming law (if they become law at all).

Disclaimer

Where the immediate tenant has gone into liquidation or become bankrupt and the landlord does not want to take possession, disclaimer is likely. Only a liquidator or trustee in bankruptcy can disclaim a lease (disclaim is a unilateral step which brings the lease to an end). If there are subleases which the landlord wants to preserve, he will seek to regularise the position in order to preserve the income stream.

The landlord has no power to force the subtenant to stay following disclaimer of a head lease. If the subtenant wants to remain, it can do so by applying to the Court for the head lease to be vested in it; or simply remain in occupation, paying the rent and complying with the obligations under the head lease.

Additional security

A volatile economic climate coupled with debtor-friendly insolvency procedures and proposed changes to the law, means that landlords will need to be more sophisticated in their lease negotiations. Increasingly, landlords are relying on the well established landlord remedies such as guarantors, rent deposits, sub-tenants and authorised guarantee agreements (AGA) from previous tenants. These are good sources of security for a landlord in the event of a defaulting tenant. It goes without saying that landlords should be seeking to secure a rent deposit or guarantor when negotiating the terms of a new letting. Solicitors acting for landlords should ensure that a rent deposit is drafted to be either held on trust or on a charging basis failing which the landlord will rank along side other unsecured creditors in the event a tenant becomes insolvent. If a tenant is in administration, then the landlord will require the consent of the court or administrator to enforce any security.

Where permitted, the landlord should always request an AGA from the exiting tenant on an assignment of a lease. Seeing as a landlord is restricted in its actions against a tenant in administration, Individual Voluntary Arrangement (IVAs) and Company Voluntary Arrangement (CVAs), it is useful to have a former tenant under an AGA on the hook. It is crucial for a landlord to consider the extent of a guarantor’s liability and when drafting the guarantor provisions, it is important to ensure that the guarantor’s liability extends to any holding over period under a protected tenancy. An additional consideration is whether the landlord requires the guarantor to simply guarantee the rent or require the guarantor to take a lease in the event of forfeiture or disclaimer.

It should be noted that unless there is express wording to the contrary the guarantor’s liability will end upon dissolution of the tenant company.

Section 17 of the Landlord and Tenant (Covenants) Act 1995 requires landlords to serve notice on former tenants and guarantors. However, notices should only be served on guarantors and former tenants if the landlord is certain that they would make a satisfactory tenant as once the arrears are paid of by the former tenant or guarantor, then they are entitled to take an overriding lease.

Surrender

Where forfeiture is not an option, a landlord may decide to accept a surrender of a lease from the tenant which is essentially the landlord agreeing with the tenant to bring the tenancy to an end.

In a rising market, surrender may be a better option for the landlord as it enables him to re-market the property and secure a tenant with a better covenant. As soon as the lease is surrendered, the landlord gets the premises back and is able to look for new tenants.

On the flip side, in a slow market, the chances of recovering the rent from the current tenant maybe greater than finding a replacement. Furthermore, a landlord will need to consider the implications of leaving the premises empty. As from 1 April 2008, full business rates are payable on buildings that have been vacant for 3 months or more. (in the case of industrial/warehouse property the period extends to 6 months or more).

Agreement with the tenant

A landlord could consider an informal arrangement with the tenant such as granting a rent concession or offering alternative premises. These are considerations which are worthwhile in respect of a reliable tenant. In the current climate, landlords may be more willing to enter into an arrangement with a tenant in difficulties rather than face the prospect of re-letting or being left with a void.

Conclusion

We are likely to see a rise in the number of corporate insolvencies, and companies going into administrations or entering into CVAs and IVAs.

It can be argued that the current/proposed changes to the law are more favourable to tenants than landlords. Therefore, the key message for landlords is to remain diligent, watch for early warning signs of tenant insolvency/financial difficulty and act quickly when the landlord suspects that a tenant may be in financial difficulty.

(The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. No responsibility can be accepted for any loss as a result of acts or omissions taken in respect of this article.)

 

This article is free to republish provided the authors resource box below remains intact.

E-renter asked:


There comes a time when every landlord finds himself / herself in a difficult position of having his rental property occupied by a tenant who is not paying rent, or is making a nuisance of himself and causing problems for other tenants, or is causing immense damage to the rental unit, or his / her conduct makes it impossible to continue with a landlord / tenant relationship. Though, state laws governing eviction vary significantly, the following are a few tips to help landlords finding themselves in the unpleasantly messy situation of evicting a tenant.

As the owner of a significant number of residential units, it will be to your benefit to engage a lawyer to advice you on eviction issues, as well as, for handling legal actions. An established relationship with a lawyer is useful as he will carry out various legal tasks charging a flat fee only, whereas, hiring a lawyer on a case to case basis can result in much higher legal fees.

Evicting a Tenant for Non-payment of Rent

The eviction process involves serving a formal notice, informing the tenant the rent is overdue, and he / she faces possible eviction, if they do not pay on time. If a landlord is not knowledgeable about the legal terms of a notice, there are pre-printed forms which fulfil all legal requirements for a proper notice. In case, the rent arrearage has not been paid after the legally defined period i.e. usually, about a week, a landlord can begin eviction proceedings on the basis of non-payment of rent.

Bear in mind, if the tenant makes a partial payment during the eviction process, in most jurisdictions the acceptance of any payment of rent, even a small amount, can result in dismissal of the eviction lawsuit for non-payment.

Lease Violation

When a tenant does not comply with the terms of the lease he / she signed, a landlord must provide a written warning, referring to the lease clause being violated, and allow him / her time to remedy the problem. This is so the tenant cannot later claim ignorance that he / she did not know, they were in violation of the lease, or they received no notice of the violation. The judge will be in favour of the landlord if it is established the tenant ignored a prior notice and the deadline.

Health and Safety Issues

Certain tenants may pose a health or safety problem for other tenants or for the property, in general. In many jurisdictions, it is permissible for the landlord to evict tenants whose conduct is hazardous to the health of other tenants or can damage the property. First of all, a landlord should serve the tenant with a fixed period of time notice (a week) to remedy or repair the problem, or else move out. If no corrective action is taken, a landlord can proceed with the eviction proceedings.

Even if a tenant resolves the issue, but you still want him / her out, serve them a notice on eviction on health or safety grounds, as well as, a notice stating their tenancy is being terminated.

Bankruptcy

In the event a tenant files for bankruptcy, an automatic stay prevents a landlord from continuing with the eviction proceedings until the bankruptcy is resolved, or the bankruptcy court permits eviction proceedings to continue by lifting the stay. This may require a motion to be brought before the bankruptcy court, asking for the stay to be lifted.

Tenant Counter-Claims

When a landlord begins eviction proceedings, some tenant may bring counter-claims against the landlord, such as, inadequate maintenance of property or violation of the lease, and may ask the court to stop eviction proceedings or else for a substantial rent decrease in arrearage owed.

This is why it is good practice to keep written records of any complaints received from tenants about the rental unit or common areas, and steps taken by the landlord to resolve them, as also with warnings of tenant misconduct. Remember a landlord’s can preclude a tenant’s claim that despite repeatedly complaining about a problem with their unit, the landlord failed to respond with positive action, as long as the landlord has kept records of all interaction with the tenant and of action taken.

Trials

Before going to court, a landlord must ensure all his documentation in relation to the case is in order and there is nothing missing. Unless a landlord is conversant with the rental laws of his state and has had enough experience in eviction cases, it is also advisable to engage a lawyer, well versed in property law of the state a landlord’s rental property resides in.

The above should provide you with enough knowledge of what is required for a successful eviction.