The clock is ticking: Landlords should be aware of the deadline to recover unpaid sums from previous tenants


24-06-2020
hourglass with sand sifting through

In the current climate, there are many landlords that will not receive payment of the June quarter's rent and many who also did not receive payment of the rent due in March. Susanne Hinde of Hewitsons discusses the issues.

On top of the rent, tenants may owe landlords for service charge or insurance. This coupled with the restrictions on the ability of landlords to recover such sums by virtue of traditional recovery routes of forfeiture, winding-up or commercial rent arrears recovery means that some landlords are finding themselves in financial difficulties.

The government’s recent guidance published to encourage commercial tenants and landlords to work together to protect viable businesses is welcomed. However, for those landlords that have previously allowed a tenant to assign their lease and now find their current tenant is unable to provide payment for the sums due, it would be prudent for them to preserve their rights to recover such sums from the original tenant/guarantor. Where the former tenant or its guarantor was required to enter into an authorised guarantee agreement on assignment there is the possibility of serving a notice on the former tenant or its guarantor in order to recover the sums from them instead of the current tenant in occupation.

In what circumstances can you pursue a prior tenant, or guarantor?

Where a tenant has assigned its lease, the former tenant’s liability under the lease automatically ends. However, the former tenant may still be liable for defaults by the current tenant if the former tenant was required to provide an authorised guarantee agreement on an assignment. There is a strict timeline under which a landlord can pursue the former tenant or its guarantor for any rent that is due. The landlord is required to notify a former tenant or guarantor promptly, within six months from the date that the sum became due by serving notice. Failure to serve notice within the allotted period will result in a loss of the landlord’s ability to claim against the former tenant or its guarantor.

What needs to be included in the notice?

The notice has to be in a specified form and it must provide the former tenant or guarantor with details of the charge for which sums are due. The landlord can only claim in this way to recover sums due for outstanding rent, service charge, sums owed for repairs, maintenance, insurance or improvements. Although this list is prescriptive, it does cover most costs for which a landlord is entitled to recover sums for its tenant. Additionally, the notice must set out the sum which is due. It is important to note that the landlord will only be entitled to recover the sum stated in the notice plus interest. Therefore, where the full amount of the sum is not yet known, the landlord’s notice must clarify this. Landlords are still obligated to serve a notice in the prescribed form, within the six month deadline to recover sums that become due where the sum cannot be ascertained.

Consequences of payment

Where a former tenant or its guarantor is served with a notice as a result of a default by the current tenant requiring payment of a sum due, and proceeds to make full payment, the former tenant or guarantor may request an “overriding lease”. This makes the former tenant or guarantor effectively the landlord of the current tenant, and the former tenant therefore has the option to terminate the current lease with the defaulting tenant if it sees fit. Landlords should therefore always be sure before serving a notice on its former tenant or guarantor that it is willing to accept the party as a tenant, in case this option is utilised.

In circumstances where landlords have the option of pursuing a former tenant or guarantor for a current tenant’s default in payment, it is vital that landlords consider serving notice on any former tenant or guarantor. Failure to serve notice will result in losing the ability to pursue the sum owed from the former tenant or guarantor, who may be in a better financial position than the current tenant to pay the arrears.

For further information please contact Susanne Hinde on 01223 532728 or click here to email Susanne.

 

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