How to recover commercial rent arrears?
Where a commercial tenant falls into rent arrears, a landlord can:
terminate the lease early under an ‘irritancy clause’
use their powers under a landlord’s hypothec
bring a court action to recover the rent arrears
seize money at the business premises through an ‘attachment for rent’
start insolvency or bankruptcy proceedings against the tenant
A landlord can terminate a lease early under an irritancy clause contained in the lease. Generally, commercial leases contain an irritancy clause specifying when a landlord can use it. Such a clause may, for example, specify that a landlord can bring the lease to an end under it where the tenant has not paid rent.
A landlord can only bring a lease to an end on the ground of non-payment of rent, where the tenant is in two years’ of rent arrears. Before the lease can be brought to an end, the landlord must send the tenant a notice by recorded delivery. This notice must give the tenant at least 14 days to repay the arrears and should state that the lease will be terminated should this not be done.
Where rent arrears remain outstanding after the lease is terminated, the landlord can take further action (namely legal action) against the tenant to recover the debt.
A landlord’s hypothec grants a commercial landlord security over any movable property that is kept on the rented land or property, and that the tenant owns. Such a security will become relevant if the tenant becomes insolvent. If this is the case, the landlord’s security over the movable property means that they will be paid back first from the money raised by the sale of the property.
A landlord’s hypothec grants security for unpaid rent and only continues for the duration that the rent remains unpaid for.
A landlord’s hypothec does not apply to:
items kept in a home, a mobile home, a croft, or on agricultural land
property owned by someone other than the tenant
property a third party obtained from the tenant in good faith
To recover rent arrears without possessing the property, a landlord may bring a claim to the Sheriff Court. A landlord can also do this, where the property has already been repossessed but rent is still owed by the tenant.
An order granted by the Sheriff Court allowing the landlord to recover commercial rent arrears is called a ‘decree’. This decree will be recorded on the tenant’s credit reference file for six years and can affect the tenant’s ability to obtain further credits.
If the tenant cannot repay the debt in full immediately, they can request for time to pay back the debt. In deciding whether to grant this, the Sheriff Court will consider the tenant’s individual circumstances, their income and outgoings; they will then decide how much the tenant is to pay back each month.
Provided that the tenant keeps to the payment order made by the Sheriff Court, the landlord cannot generally take any further action against the tenant. Where the tenant misses a payment on decree, the landlord can take further action against them through the courts.
Attachment for rent
Where a landlord has obtained a decree against a tenant, or the courts allow the landlord to take further action, they can send the tenant a ‘charge for rent’. A charge for rent is a formal request asking the tenant to pay the rent they owe. The tenant will have a stated time limit (usually 14 days) to pay. Once this time period has expired, the landlord can ‘attach’ money held in business premises. Where such a money attachment takes place, the sheriff officers can open cash tills without having to get permission from the courts.
Where the commercial lease is registered in the Books of Council and Session, the landlord is usually allowed to immediately take enforcement action against the tenant where they fail to pay rent under the lease.