Article by Nadine Wessel AAPI (CPM) – MRS Property, member of the Future Directions Committee.
Over recent years we have seen an increase in the number of businesses that are unable to maintain creditor payments, including property rentals. Generally there are tell-tale signs that a business is beginning to experience difficulties meeting their financial commitments. With respect to property rentals the first sign is usually payments occurring later in the month, non-payment of outgoings or other charges and eventually rental falling behind on a monthly basis.
The Landlord, or their agent, should be proactive in identifying and addressing these issues at an early stage. If appropriate, rental rebates and payment plans can be adopted to assist the tenant in the short term.
Often however, many Landlords and/or their agents fail to act proactively and tenants do not address the issues either. Unfulfilled promises to pay the outstanding debts lead to distrust between the parties.
At this point there is serious concern that the tenant will not be able to meet their ongoing financial commitments under the terms of the lease. The Landlord, through their solicitor, may issue a Notice of Default as a final warning for the tenant to satisfy its obligations. Depending on the lease terms, the tenant may be offered a reasonable time period in which to remedy the breach.
The next step may be for the Landlord to take back possession of the premises, i.e. change the locks. This is often distressing for the tenant as they may have been oblivious to the seriousness of their situation.
Following this re-entry action the Landlord may terminate the lease. The tenant will be required to remove their goods from the premises; should they not do this then any goods will be classed as “abandoned goods”. This option would generally be applied if the goods have minimal value, i.e. insufficient to cover the monies owing to the Landlord.
The second option is to issue a Warrant of Distraint over the goods. A baliff is engaged and will take an inventory of the goods in the premises. The difficulty with distraint action is that the Landlord’s claim to the goods will be subject to any person having a prior interest. Any such person must come forward within five days. We quite often find that goods are held on fixed or floating charges and are owned by a finance company, or items are licenced to the tenant, for example a fridge owned by the beverage supplier, so ownership is difficult to establish.
After the five days have passed the Landlord must sell the goods at auction. The proceeds are to be paid in order against a) the costs of the distraint action, b) the sale process of the goods and then, c) rental. Upon completion of the distraint the lease is terminated. The purpose of distraint is to try to re-coup outstanding rental owed by the tenant. The action of holding their stock generally encourages tenants (where they are able) to pay their debts quickly (thereby lifting the distraint) however this is not always the case.
By undertaking either option, the Landlord retains the ability to sue the tenant for arrears and damages. Throughout this period the Landlord is obligated to seek to mitigate all of its losses, for example engaging a leasing agent to reduce letting up time in the event that the tenant does not continue.
This entire process highlights the importance of ensuring, to the extent possible, that tenants have a solid business.
Pro-active management of the asset is paramount in this regard and should ensure that issues are identified in advance, limiting the need for such action. During the lease negotiations the requirement for financial references and security over the tenant’s commitments is sometimes overlooked. At the time of a distraint the folly of not having carefully considered these issues becomes stark.