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The commercial landlord in a pandemic: What to do about lease arrears

Litigation Lease Arrears PIC 500x332

It will come as no surprise to hear that a large number of commercial landlords are becoming increasingly concerned about accruing or ongoing arears which have arisen (or been exacerbated) by tenants struggling in the current commercial climate.

The government has introduced legislation which has an impact on this [The Coronavirus (Scotland) Act 2020 (“the Coronavirus Act”)] and have also released some guidelines seeking to address and recognise the inevitable conflict that has arisen between landlords and tenants [The Code of Practice for Landlords and Tenants of Commercial Property (“the Code”)]. The requirements of the Act are mandatory, whereas the Code is advisory.

What can landlords do to minimise their exposure and recover arrears from tenants?

The fastest, and in many ways the most effective way, to start the process for recovery of commercial rent arrears is to proceed straight to enforcement. Commercial leases are generally “registered for preservation and execution” which means that an extract of the lease will allow a landlord to proceed straight to summary diligence without the need to obtain a court order, as long as the lease has been properly registered in the Books of Council and Session. ‘Diligence’ is a legal term used in Scotland to describe methods used to enforce a court order.

To be able to utilise this expedited procedure, the sums due must be easily established from the lease and must be clearly ascertainable.

If the lease is registered, the landlord can instruct enforcement officers (Sheriff Officers or Messengers-at-Arms) to take one (or more) of a number of diligences available.

Diligence usually starts with serving a Charge for Payment on the tenant.  A charge for payment is a formal demand and requires to be served by Sheriff Officers (or Messengers at Arms).  The charge for payment is a fourteen-day notice to the tenant to make full payment of arrears.  Usually, the legal costs in serving the notice can be included.

If the tenant fails to make payment within the 14 days, then the landlord can proceed with further diligence. This can include:-

  • bank arrestment
  • Inhibition of property
  • Petition for Sequestration or the Winding-Up of a company.
  • Attachment of goods or funds

In the event that a lease is not registered for preservation and execution, the landlord’s usual remedy would be raising a debt recovery court action. There are two obvious disadvantages in having to proceed to court being time and cost.

When assessing what steps are required, thought should be given to what the landlord ultimately wishes to achieve. Proceeding with summary diligence is purely a mechanism to recover the arrears due at the time of the execution of the diligence. If the landlord ultimately wants to irritate the lease, then Irritancy Notices should be served. As a result of terms contained in the Coronavirus Act, Landlords now require to give 14 weeks’ notice of termination (as opposed to the usual 14 days). If the irritancy is based on the fact that the tenant is in arrears, then payment of those arrears within the 14 week period will negate the Irritancy Notices.

A landlord can only irritate a lease for a non-monetary breach of the lease in restricted circumstances.

In the current commercial climate, most landlords will want premises to remain occupied and will prefer to come to a repayment arrangement with tenants. However, in some cases, it may take the implementation of formal proceedings to persuade the tenant to address the matter of arrears.

The terms of the Coronavirus Act are currently in place until 31 March 2021 and the Scottish Government has the power to extend this. The Act has a significant impact on a number of remedies that would ordinarily be available to a Landlord, so advice should be sought to be fully aware of available options, current legislative restrictions, as well as the cost and time implications of available remedies.

Contact us

Whether as a commercial landlord or tenant requiring advice on the above or any other aspect of commercial property, please get in touch.

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