What is the dispute and when might the dispute arise?
Non-payment of money due in line with the terms of a lease is a very common (and understandable!) cause for dispute. Whether you are a tenant struggling to pay your rent or a social landlord with tenants entering arrears, it is vital that you address this as a matter of priority. Failure to act can be costly, time-consuming and stressful. Tackling the issue should relieve some, if not all, of these pressures.
What to do if a dispute occurs?
The first point of reference in any dispute over payment is your lease or licence. This document sets out your obligations to pay rent, service charge and any other sums which the landlord may be able to recover.
Your lease or licence should reflect the terms agreed between you and your landlord during negotiations, and you should hopefully be aware of the terms to which you agreed. Click here for information on negotiating your lease and specific terms to look out for.
In order to move forward with a payment issue you must establish:
• What amount is due under the lease?
- This will be determined by the terms of your lease, and may include rent, services charge and other sums (eg. building insurance)
• When are these payments due?
- Your lease or licence will specify when payments are due. Rent and Service Charge due quarterly in advance on the quarter days (25th March, 24th June, 29th September and 25th December) is the common form of rent payment for general commercial leases. Leases will in most circumstances specify what is due on or before the quarter day. One-off invoices incurred by the landlord (eg. insurance premiums) may also often be specified as being recoverable immediately from the tenant.
• What happens if you pay late?
- If you pay late, then it is likely that the landlord may seek interest due from the date the payment was due. Again, consult your lease to establish whether interest is chargeable, and whether you benefit from an interest “grace” period on late payments. In most cases, if you pay within a reasonable time frame this will be the extent of possible repercussions. However, late payment may also cause you to breach the terms of your lease, the results of which are considered below.
• What happens if we fail to pay?
- If your organisation fails to pay all of the money owed under the terms of your lease, then you are officially “in breach” of the terms of your lease or licence.
Broadly, there are two options available when a breach occurs:
1) Speak with your landlord and agree a timetable to remedy the breach (i.e. pay money owed)
It is very important to speak to your landlord before late payment. Most landlords will want to keep you in their property, particularly if you have been paying regularly to this point. Discuss the matter clearly with your landlord and find out all the options available which the landlord might consider. Do not wait until you have missed your payment before contacting the landlord if you know the funds will not be available.
To place yourself in the best position to reach an agreement, before contacting your landlord ensure you:
• Appraise your position
- Realistically assess your financial position and work out date(s) when payment(s) might be made. This will provide the landlord with a clear understanding of the money he is to receive and when, whilst also providing a measure by which he can check on your progress.
• Support your argument
- Provide supporting evidence in the form of a business or organisational plan to support your position. This will provide the landlord with confidence in you as a tenant, and therefore will be more likely to grant concessions.
• Know your figures
- When assessing your position you must establish whether this a short term cash flow issue or a more serious, long term problem. If the issue is fundamental (loss of a major funder), be honest with the landlord.
• Be resilient, but realistic
- Don’t be surprised if your offer is rejected at first instance. The landlord is unlikely to be keen on making concessions where he has no contractual obligation to do so, therefore be prepared to negotiate and understand the strengths and weaknesses of your proposal. Perhaps discuss issues relating to the lease, such as repairs, or problems you might be experiencing with property management or other tenants. This may remind the landlord that it has obligations to you under the lease too.
Be aware, it is always comforting to underestimate the scale of any problem. Try to resist making unrealistic assurances regarding payment. A landlord is likely to be more frustrated by a missed payment schedule than failure to receive his original rent on time.
In certain circumstances a Landlord may agree to formally or informally vary the lease in order to provide some form of concession to the tenant. Some potential areas you could look for compromise are:
• Shorter payment periods
- pay monthly rather than quarterly; weekly rather than monthly; etc.
• Rent holiday/Rent Free period
– contractually agreed period where no rent payable
• Temporary/Permanent rent reduction
– specified for a specific period or for duration of lease
• Alternative accommodation
– where landlord owns multiple units, may offer smaller/more appropriate accommodation.
If allowed for in your lease, you could look to surrender, break, assign or sublet. For more information on ways to end your lease, please click here.
Be aware that many leases state such clauses cannot be invoked whilst a tenant is in breach.
2) Legal Action
If the landlord is unwilling to negotiate or a satisfactory arrangement cannot be reached, then legal action may be taken by the landlord to remedy the breach. This may include:
• Court Action
- The landlord may commence a civil action to recover the debt. In this circumstance you will receive notification that the claim has been made against you. If you receive a legal notice, don’t panic! Organisation is key, as you must respond to the notice within the given time period set out in the letter to avoid “judgement in default”.
• Winding Up
- If your organisation is also a limited company, the landlord may consider issuing winding up proceedings against you. The result of winding up proceedings may be a winding up order, which is an order of the court resulting in the compulsory closure of a limited company. This requires the company to stop trading along with suspension of bank accounts. These proceedings are brought via an application to the court to issue a winding up order should debts not be paid. A winding up order has very serious consequences for your organisation, and you must act to prevent legal closure.
- This involves the attendance at the premises of a bailiff. With commercial premises the bailiff is not court appointed, and the landlord does not have to refer to the courts before instructing a bailiff. The bailiff can attend at the premises and “distrain” on items of value within the premises. This means that the bailiff can remove items from your premises which can be sold at auction to recover the outstanding debt.
The bailiff will prefer to collect the outstanding debt along with his fees directly from you without removing goods from the premises. Be aware fees can be high and will in most cases be payable by you as the tenant.
If you do not have the money immediately available, the bailiff may consider undertaking a walking possession order. This means that he will take note of the goods at the premises along with their value, and these goods legally belong to the bailiff and can be removed and sold if necessary. He will then provide you with a deadline by which you must pay the full debt and bailiff fees, otherwise he will return and remove the items. It is an offence to remove items from the premises which are subject to a walking possession order.
If a bailiff has entered the premises, they are likely to request immediate payment of all payments outstanding. If they do not receive this they will threaten to remove items that day should payment not be received. At this stage, it is important to clarify:
• Total monies claimed to be outstanding;
• How this sum is made up (rent service, service charge, etc)
• What are the additional bailiff costs? Are they included in total figure?
• Are there any further sums not included in these figures?
Compare the figures provided with the information you have on file. If you dispute the outstanding figure, raise this with the bailiff
If a bailiff does attend your premises, it is important not to panic and to be aware of what a bailiff can and cannot do. There are certain rules that they must adhere to:
• Operate during “reasonable” (usually normal office) hours
• Cannot break into premises or change locks while property occupied (must be “peaceable re-entry”)
• Cannot distrain other than at the property to which lease relates (ie. cannot go to house of leaseholder)
• Cannot distrain on goods not on premises
• Cannot distrain on certain specific types of goods e.g. tools, goods, vehicles and other items of equipment necessary for use by you in your employment, business or vocation. This does not usually include computer and general office equipment.
As with the winding up procedure, this option is often unproductive for the landlord as the value of office equipment etc in the case of many charities and social enterprises is low and goes little way to covering costs, whilst making it impossible to carry out a service business.
- The landlord may, in certain circumstances, choose to forfeit the lease. This means the lease is brought to an end with the landlord taking occupation of the property. This is usually done by changing the locks on the premises. At this point, your ongoing responsibilities under the lease will cease, however be aware that your previous arrears will still apply and can be pursued through other means.
Where legal action is a prospect or has commenced, it is very important to take appropriate advice. Please contact our Property Advice Team for advice and guidance or referral to a legal advisor.