#16675 - Remedies For Breach Of Lease Covenants

REMEDIES FOR BREACH OF COVENANTS

Commercial Leases


Dealing with Tenant’s Non-Payment of Rent
Option	Procedure	Advantages & Disadvantages
Take T3 to Court for the debt	Take T3 to Court Submit claim form and particulars of claim Same as CIVLIT procedure	Pros	Shows T that L means business, won’t let things slide and may be successful in obtaining outstanding rent
Take T3 to Court for the debt		Cons	Litigation is costly/stressful Even if successful, L won’t recover all legal costs Only viable if current T is solvent
Threaten to commence insolvency proceedings – force T3 into insolvency	If T is a company, it must owe more than 750 If T is an individual, they must owe more than 5,000 Then, L can serve a Statutory Demand on T T has 21 days to pay up – if T fails to pay, Court will declare T insolvent/bankrupt	Pros	Threat may scare T into paying up
		Cons	T may call L’s bluff and allow the business to become insolvent L will be an unsecured creditor – will be at the back of queue for any money owing
Commercial Rent Arrears Recovery [CRAR] (set procedure)	Tribunals, Courts and Enforcement Act 2007 [Part 3] Must be 7+ days’ worth of rent outstanding L must give T 7 days’ notice of its intention to seize goods to value of rent owed L can then send in enforcement agents to seize T’s goods and sell them to repay rent monies owed L must hold on to the goods for 7 days before putting them up for sale at auction at a public auction & must notify T of the time and place of auction	Pros	Good as an immediate solution if T has valuable goods that will cover cost of rent owed
		Cons	Many goods are exempt and cannot be seized, so there may not be sufficient goods at the premises to satisfy the outstanding rent payment e.g. property that is leased; equipment necessary for T’s business up to 1,350
Pursue T2 under AGA [New Lease] Pursue T3’s Guarantor or Original T (T1) [Old Lease]	Under a new Lease, T2 is likely to have entered into an AGA with L upon assigning to T3 – need to check with L (client) that it did actually get an AGA from T2. Therefore, L can pursue T2 for the outstanding rent. Under an old lease, L could pursue T3’s guarantor. Alternatively, L could also pursue T1 as its liability would still be ongoing. As L is seeking a ‘fixed charge’ (i.e. a quantifiable sum) from T2: S.17 L&T(C)A 1995 L must serve ‘Default Notice’ of the debt on T2 within 6 months of default by T3 If time limit missed, L cannot pursue for that specific debt BUT can pursue for next quarter’s rent if unpaid by T3	Pros	As long as L serves notice in time, L is likely to be able to recover so long as T2 is still trading & solvent
		Cons	If T2 is no longer trading or is insolvent - it will not be worth pursuing to satisfy the payment
	If T3 breaches a leasehold covenant & L has served a s.17 notice on former T/guarantor (to recover a fixed sum), they can serve a s.19 notice on L for an overriding lease. This basically makes former T/guarantor the ‘intermediate’ L between head L and current T. This means they can seek to forfeit the lease rather than get hit continually for each outstanding quarter’s rent by head L.
Surrender	Only available if T agrees to early termination	Pros	Can end lease in a cost-effective & timely way Could be good if L has another tenant lined up to take over - if so, L could offer T3 an ‘incentive’ to move out early
Surrender	Only available if T agrees to early termination	Cons	May have to offer T3 an ‘incentive’ to move out If market is weak and a new tenant is unlikely, it may be better to keep a tenant who pays sporadically than to leave the premises unoccupied L would lose ability to sue T2 under AGA if T3 agrees to surrender
Threat of Forfeiture as T3 is in breach of covenant (but don’t follow through)	CHECK FOR FORFEITURE CLAUSE IN LEASE (express re-entry provision)** L has right to forfeit if T3 has breached lease obligations S.210 Common Law Procedure Act 1852: if less than 6 months rent outstanding, L must serve ‘formal demand’ UNLESS lease states otherwise – check lease! “whether formally demanded or not” L must not have waived breach (e.g. accepting late payment of rent) – check with client whether this has occurred L has 2 options: Peaceable re-entry – L can go in & change locks at night when premises are unoccupied [to avoid criminal liability]* Issue and serve court proceedings on T3 for Court Order for Possession T3 has right to apply to court for relief Must pay outstanding rent + L’s legal costs	Pros	Threat of forfeiture often means T will pay up if it wishes to retain the premises (otherwise T won’t obtain relief from the Court) If T doesn’t pay up, L will be successful in obtaining a Court Order for possession and can then get a new tenant into the premises
		Cons	Even if T can pay this time (to obtain relief), if its financial troubles continue, will it be able to pay next time rent is due? Will L have to go through the whole process all over again? Dangerous strategy in a poor property market – time-consuming, going to court is expensive, no guarantee T will pay up If T doesn’t pay up and L obtains court order to evict T, there may not be anyone to re-let premises to – no income

* Peaceable (physical) re-entry [PR]

Problematic – only used by ‘bullish’ landlords [cannot be used for residential premises]
S.6 Criminal Law Act 1977: criminal offence to use or threaten force to gain re-entry while person on premises is opposed to re-entry
Potential breach of Human Rights Act 1998 [Protocol 1 Article 1 - right to peaceful enjoyment of one’s possessions]
Consequently, PR only used in unoccupied commercial premises – L will enter and change locks at night
L may be unsuccessful - T can apply to Court for ‘relief’ from forfeiture by PR,
- i.e. Court can set aside re-entry (Billson v Residential Apartments (1992) – generally available where T pays outstanding rent & L’s legal costs

** Forfeiture Clause

‘The Landlord may in any of those cases at any time (notwithstanding any waiver of any previous right of re-entry) re-enter the Premises or any part in the name of the whole whereupon the Term will end, but without prejudice to any rights which have previously accrued in respect of any antecedent breach of any of the covenants in this Lease (including any breach which has given rise to the re-entry).’


Dealing with Tenant’s Failure to Repair
Option	Procedure	Advantages & Disadvantages
Take T3 to Court for damages	s.18 L&TA 1927 caps the amount recoverable – damages cannot exceed the amount by which the value of the reversion has been diminished by the breach L must serve s.146 Notice on T: Specify breach to be remedied [L would need to obtain evidence of disrepair] Specify remedy Require breach to be remedied within a reasonable time (how long? – depends on state) For leases granted for a term of 7+ years with at least 3 years left to run, the LP(R)A 1938 lays down a special procedure*** to be followed before being able to sue for damages for breach of the repair covenant Submit claim form and particulars of claim – same as CIVLIT procedure	Pros	If CC is worth suing financially and the costs of repairs is not higher than the reduction in the value of the reversion, B will get the monies back.
Take T3 to Court for damages		Cons	If CC is in financial difficulties, not worth suing. Also, going to Court takes time, consequently, the damage could be worsening while this process takes place.
Exercise ‘Self-Help’ Remedy	CHECK LEASE FOR EXPRESS PROVISION ALLOWING THIS – i.e. allows L: [see WS10 d1b, p16] to inspect premises to check state of repair upon discovery of repair, to serve Notice on T to start repairs immediately and finish within specified time to enter premises, effect repairs, and recover costs from T where T fails to carry out repair within these timescales	Pros	quick, no legal fees or delay for Court proceedings If T doesn’t reimburse L for repair costs, L can pursue the monies owing as debt action rather than damages – so it would not be subject to the s.18 cap
Exercise ‘Self-Help’ Remedy		Cons	L may not recover the cost of repairs from T if it is in financial difficulties
Pursue T2 under AGA [New Lease] Pursue T3’s Guarantor or Original T (T1) [Old Lease]	Under a new Lease, T2 is likely to have entered into an AGA with L upon assigning to T3 – need to check with L (client) that it did actually get an AGA from T2. Therefore, L can pursue T2 for the outstanding rent. Under an old lease, L could pursue T3’s guarantor. Alternatively, L could also pursue T1 as its liability would still be ongoing. IF L is seeking a ‘fixed charge’ (i.e. a quantifiable sum) from T2: S.17 L&T(C)A 1995 L must serve ‘Default Notice’ of the debt on T2 within 6 months of default by T3 If time limit missed, L cannot pursue for that specific debt BUT can pursue for next quarter’s rent if unpaid by T3 See diagram above	Pros	L can use the ‘self-help’ remedy and then, as long as T2 is still trading & solvent, recover costs of repair from T2.
		Cons	If T2 is no longer trading or is insolvent, it will not be worth pursuing T2 under the AGA to satisfy the payment for the repairs.
Surrender	Only available if T agrees to early termination	Pros	Can end lease in a cost-effective & timely way Could be good if L has another tenant lined up to take over - if so, L could offer T3 an ‘incentive’ to move out early
Surrender	Only available if T agrees to early termination	Cons	May have to offer T3 an ‘incentive’ to move out If market is weak and a new tenant is unlikely, it may be better to keep a tenant...

#16675 - Remedies For Breach Of Lease Covenants - Property Law and Practice

About Oxbridge

More Property Law And Practice Samples