Recovering commercial rent arrears in Scotland

What are commercial rent arrears?

Commercial rent arrears refer to overdue rent payments that a tenant owes to a landlord for a non-residential property, such as an office, shop, or industrial unit. These payments are specified in the original commercial lease.

What are my main options for recovering commercial rent in Scotland?

Before taking formal action, it's often best to contact the tenant to find out why they haven't paid. If that doesn't work, your main legal options are:

• using summary diligence (if your lease allows it)

• using the tenant's rent deposit (if you have one)

• recovering rent arrears from a guarantor (if one exists)

• terminating the lease (known as 'irritancy')

• starting a court case (an 'action for payment')

• starting insolvency proceedings (as a last resort)

What is summary diligence?

Summary diligence is a fast-track way for a landlord to enforce payment of a financial debt (like rent arrears) without needing to go to court.

It's only available if your commercial lease includes a special clause where the parties agree to 'registration for execution' or 'registration for summary diligence'. This clause must have been acted upon, and the lease registered in the Books of Council and Session (which is standard for most modern commercial leases in Scotland).

This registration means the lease acts like an instant court order, allowing you to use officers of the court (known as sheriff officers) to recover the money you're owed.

What enforcement actions can be taken?

Once you have the right to use summary diligence, a sheriff officer can take several types of action (known as 'diligence') to recover the debt. The first step is usually serving a 'charge for payment', which is a final warning. If the tenant doesn't pay within the time limit (eg 14 days), you can then use other actions, such as:

• arrestment - freezing money held by a third party (most commonly, the tenant's bank account)

• attachment - seizing the tenant's goods or equipment from their premises so they can be sold at auction

• money attachment - seizing cash, cheques, or other payments found at the tenant's business premises

• inhibition - placing a legal block on any property the tenant owns in Scotland, preventing them from selling it or securing a loan against it

For more detailed information on how these enforcement actions work, read Decrees in Scotland.

Using the rent deposit

If you took a rent deposit at the start of the commercial lease, your rent deposit deed (ie the deposit agreement you both signed) will outline the exact rules for using it. You can usually deduct the unpaid rent directly from this fund.

However, you must follow the terms of the deed carefully. This usually means telling the tenant in writing what you've done and why. If the lease is continuing, you can also usually require the tenant to 'top up' the deposit back to its original amount. The main drawback is that a deposit is often only worth a few months' rent and may not cover the full amount you're owed.

Checking for a guarantee

It's vital to check your lease documents for a guarantee. This is a separate promise, often from the tenant's parent company or directors, to cover the tenant's debts.

You should check the wording of the guarantee carefully to see whether the tenant's non-payment has triggered the guarantor's liability, what steps you must take to make a claim, and what options you have under the guarantee. If you have one, you can often demand payment of the rent arrears directly from the guarantor. This is a powerful option as it bypasses the non-paying tenant. Your ability to do this depends on the exact wording of the guarantee and, of course, the financial strength of the guarantor.

Ending the lease (irritancy)

Irritancy is the Scottish legal term for terminating the lease early due to a tenant's breach (like not paying rent). This option does not recover the money you're owed, but it does allow you to regain possession of your property, enabling you to find a new tenant.

This process is highly technical, and you must follow a very strict legal procedure. It usually involves serving a formal warning notice (a 'pre-irritancy notice') which gives the tenant a minimum of 14 days to pay the full amount. If they fail to pay within that period, you can then move to terminate the lease.

If you get these steps wrong, you could face a legal claim for damages. For more information on the irritancy process, read How to terminate a commercial lease.

Starting a court case (action for payment)

If your lease doesn't allow for summary diligence, or you choose not to use it, your main option is to go to court by raising an action for payment.

This involves starting a formal case in the Sheriff Court to prove the debt is owed. If you're successful, the court will grant a decree (ie a court order) in your favour. You can then use this decree to instruct sheriff officers to recover the debt (using the same enforcement methods as summary diligence, like arrestment). However, this process is the slowest and most expensive option. If the tenant defends the action, it can take many months and become very costly.

For more information, read Decrees in Scotland and Civil courts and civil procedure rules in Scotland.

Starting insolvency proceedings

This is a last-resort option. If the tenant owes more than a certain legal amount (£1,500 for individuals and £750 for companies), you can start insolvency proceedings. This usually begins by serving a statutory demand (or using a 'charge for payment' from summary diligence). This is a formal, 21-day demand for payment. 

If the tenant doesn't pay, you can then petition the court to:

• make an individual tenant bankrupt (known as sequestration)

• wind up a tenant company (known as liquidation)

Often, the threat of being made insolvent is enough to force a tenant to pay. However, this is a very high-risk strategy. If the tenant is genuinely insolvent, they will be wound up, and you will likely become just one of many unsecured creditors. This means you may only get back a few pence for every pound you're owed, or nothing at all.

For more information, read Bankruptcy process and Insolvency in Scotland.

Landlord's hypothec

However, if your tenant does become insolvent, you have one advantage called the landlord's hypothec under the Bankruptcy and Diligence etc (Scotland) Act 2007.

This is a legal right that gives you security over the movable property (like stock or equipment) that your tenant owns and keeps at the rented property.

This means that when the tenant's assets are sold, you have a preferential claim for your unpaid rent. Your right gets paid before most other creditors (specifically, it ranks ahead of 'floating charges'). You must tell the insolvency practitioner (ie the person winding up the company) about your hypothec right immediately. They can't just sell the assets; they need your permission or a court order to do so.

Do not hesitate to Ask a lawyer if you have any questions about recovering commercial rent arrears in Scotland.