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Managing commercial rent arrears during the coronavirus pandemic – landlords’ options

COVID-19 has had a significant impact on many businesses, particularly those operating in the hospitality, leisure and retail industries. With income suffering and recovery likely to take some time, rent arrears continues to be an issue for numerous commercial landlords and tenants across Scotland.

With a UK-wide focus on helping viable businesses get through the recovery period, legislation has been temporarily amended to protect tenants who are struggling to pay rent. A Code of Practice for commercial property relationships has also been published by the UK Government, encouraging landlords and tenants to work collaboratively during the pandemic to reach temporary agreements that support the tenant’s survival.   

However, landlords should know there are still remedies available if they are dealing with mounting rent arrears. Here, we provide an overview of your options, from compromise to termination. If you are dealing with rent arrears or any other commercial property legal issue, bespoke and detailed advice is always recommended. Please get in touch with our commercial property lawyers to discuss your concerns.

Compromise

Many landlords and tenants have opted to follow the Code of Practice and reach a mutual solution for the time being, for example, to defer rent payments or renegotiate rent. This may be the best way to preserve your relationship with your tenants at what is a challenging time for everyone. While the Code is voluntary, it offers benefits for both parties, including transparency, collaboration and reasonableness.

When making any concessions for your tenants, you must give your financial and commercial interests careful consideration. If you are struggling to reach a mutually acceptable agreement with your tenants, you may wish to look at negotiation or mediation services.

Summary diligence

If negotiations have failed or you suspect your tenant can but won’t pay, there are several avenues you can take to recover rent arrears. These are known collectively as summary diligence. Summary diligence measures can be applied without having to go to court first, making it an expedited enforcement process.

To use this procedure, your lease must state that both parties agree to this (the wording to look for is “consent to registration for execution” or “consent to registration for summary diligence”). The document must also be registered in the Books of Council and Session, which most commercial leases are.  

COVID-19 update: Restrictions were imposed on summary diligence during the first lockdown, allowing only urgent measures to be taken. These have now been lifted and sheriff officers can take action as normal. As we enter the winter months, however, it is important to be aware that this situation may change again.

Charge for Payment

In most cases, you must serve a Charge for Payment to the debtor before you can carry out diligence. This is a formal demand served by sheriff officers, giving your tenant 14 days to pay. If they fail to clear the debt within this time, you can take any of the following steps to recover the money owed to you. However, a Charge for Payment is often enough to compel the tenant to pay.

Third party arrestment

Arrestment allows you to freeze your debtor’s moveable property held by a third party. These orders are often served on banks to prevent them from releasing money to the debtor from their account. The seized funds will automatically transfer to you after 14 weeks; however, the tenant does have a right to lodge a notice of objection.

Attachment

Attachment allows you to seize a debtor’s moveable property to recover money owed to you. The property, in this case, is in the debtor’s possession rather than in a third party’s hands. There are certain exceptions to the items that can be seized, for example, property from a dwelling house, tools of trade and books required for the debtor’s profession cannot be attached. If the debt remains outstanding, the seized items will be sold at auction to recover the money owed to you.

Inhibition

Inhibition prevents the debtor from dealing with any heritable property they own, such as commercial premises. While the inhibition is in place, they cannot sell, transfer or dispose of the property in any other way, or secure any new loans against it, unless full payment is made to you.   

Court action

If summary diligence is not an option for you, because your lease is not registered for example, you can initiate debt proceedings through the courts to recover rent arrears.

COVID-19 update: Court business has resumed for non-urgent business. However, there is a backlog of cases to get through, so you might experience delays.   

Letter before action

Unlike a Charge for Payment before summary diligence, it is not mandatory to send a letter to your debtor to let them know you intend to take court action. Nevertheless, communicating your intentions to your tenant in this manner is often effective at securing payment, and so is advised in most cases.

Statutory demand for payment  

This is a formal demand requiring your debtor to pay with 21 days. Under normal circumstances, if the debt is not cleared by this time, the statutory demand can be used for a winding-up petition against the debtor.

COVID-19 update: The Corporate Insolvency and Governance Act 2020 provides that statutory demands issued to the court between 1 March and 31 December 2020 cannot be used for winding-up petitions, so they are effectively void at present. The December end date was extended from 30 September 2020.

Irritancy

If your tenant is in breach of any of their obligations (including non-payment of rent) and does not rectify this within a specified time, irritancy allows you to terminate the lease. Under normal circumstances, the minimum notice period given to tenants to remedy rent arrears is 14 days. 

Covid-19 update: The Coronavirus (Scotland) Act 2020 introduced temporary termination protection for tenants who could not pay, by extending the minimum pre-irritancy notice period from 14 days to 14 weeks. This provision will remain effective until 31 March 2021, and potentially until 30 September 2021.

If the tenant fails to pay the rent due by the end of the 14-week period, you are entitled to issue a notice of termination.

Contact our Commercial Lease Lawyers Stirling & Tillicoultry

For legal advice on any of the issues discussed here, please do not hesitate to contact our commercial lease solicitors at our Stirling office 01786 235 235 or our Tillicoultry office 01259 753 330, or using our online enquiry form.

This article is intended to give a broad overview of your options for managing rent arrears and the different processes involved. It does not constitute legal advice. If you require specific legal advice, you should contact one of our lawyers who can advise you based on your circumstances.

 

Please note this information is accurate as of 02 December 2020 and is subject to change as official guidance is adapted to reflect the implications of the virus.

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