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“Whether you are a landlord or a tenant, always contact us as soon as possible following a breach of lease covenant. Taking early advice significantly improves the prospect of achieving your preferred outcome.”Most leases contain lists of obligations, known as covenants. A breach of one or more of these obligations is known as a breach of covenant, often referred to as a breach of lease.
A detailed and clearly worded lease is crucial in avoiding inadvertent breaches. Whether you are a landlord or a tenant, always discuss your new lease requirements with our commercial property transactional colleagues.
“Mike, we are so grateful for your advice and guidance. We just wish we’d found you earlier!”
Breach of lease by tenant
Typical examples of a tenant’s breach of covenant are:
- failure to pay the rent or service charges.
- sub-letting without permission.
- carrying out unauthorised alterations.
- failure to repair.
Breach of lease by landlord
For landlords, typical breaches of covenant are:
- wrongly withholding or delaying consent for either assignment, sub-letting or alterations.
- breach of quiet enjoyment (the tenants’ right to use the property without unlawful interference from the landlord).
Quiet enjoyment in commercial leases
A tenant’s right to quiet enjoyment means they are entitled to use the leased premises without substantial interference from the landlord.
There are four key aspects to quiet enjoyment:
- peaceful use;
- exclusive possession;
- freedom from nuisance; and
- proper maintenance.
Even if the lease fails to mention quiet enjoyment, it’s automatically implied. However, a tenant must satisfy the court that the landlord’s conduct causes ‘substantial interference’, i.e., more than mere nuisance or inconvenience.
For example, a landlord cannot simply enter the leased premises without proper notice or permission. Doing so constitutes a breach of quiet enjoyment as entering without proper notice substantially interferes with the tenant’s exclusive possession.
Remedies for breach of lease
A party suffering due to a breach of lease terms usually has a number of remedies available to them. The most appropriate depends on:
- the lease wording;
- the nature and extent of the breach of covenant; and
- the suffering party’s objectives.
Depending on the circumstances, it may be appropriate to:
- consider bringing the lease to an end.
- apply for a court injunction to remedy the breach of covenant.
- undertake works which are the other party’s responsibility and then bring court action to recover the cost.
- claim damages.
It’s often possible to achieve a commercial solution without taking the other party to court. However, acting promptly to maximise your available options is also essential.
From the outset, we will advise you fully, including where you stand regarding legal costs. That includes the ability of the landlord to recover costs from the tenant under the lease terms or by an order of the relevant tribunal or court. Contact us on 01225 462871.
Dilapidation Claims
‘Dilapidations’ refers to a landlord’s claim for the cost of putting the property back into good repair and decoration at the end of the lease. The claim can include loss of rent whilst undertaking those works. Dilapidation claims can be very contentious.
The tenant may feel they have looked after the property and returned it in good condition. However, the landlord will often see things differently, especially if work is required before they can re-let the property.
Dilapidation: step-by-step
The landlord starts a dilapidations claim during or towards the end of the lease term, or once the lease has ended. In brief, the process is:
- The landlord instructs a building surveyor to produce a Schedule of Dilapidations. It sets out the relevant repair clauses in the lease and, by reference to them, the nature and rectification cost of each breach. The Schedule is sent to the tenant ‘within a reasonable time‘, generally interpreted as within 56 days of the termination of the tenancy.
- The landlord also sends a Quantified Demand to the tenant within the same timescale. It should clearly state the landlord’s position and substantiate the sums sought as damages.
- The tenant usually instructs their own surveyor, who will then correspond directly with the landlord’s surveyor.
- Many dilapidations claims settle at this point, with the parties agreeing a mutually acceptable figure.
How to respond to a dilapidations claim
In most cases where a tenant is served with a dilapidations claim, the process is as follows:
- Within a reasonable time – usually within 56 days – from service of the landlord’s claim, the tenant provides a formal response.
- The response should cover all items listed in the Schedule of Dilapidations on a point-by-point basis. The tenant should set out their position in detail, particularly where they disagree.
- At the earliest possible stage, the tenant should confirm if they believe the costs set out in the Schedule are higher than the loss in value caused to the property. If that is the tenant’s case, they should instruct a building surveyor to produce the valuation necessary under Section 18 of the Landlord and Tenant Act 1927.
Dilapidations Protocol
In 2012, the Court Rules in England and Wales adopted the Dilapidations Protocol. The Protocol encourages landlords and tenants to exchange full information at an early stage. This cards-on-the-table approach maximises the opportunities for settlement before formal court proceedings become necessary. The Protocol sets standards for:
- the content of the claim;
- correspondence; and
- the conduct of pre-action negotiations.
The courts treat the Protocol as the normal and reasonable approach to pre-action conduct. It is important to note that non-compliance with it can result in sanctions by the court.
Whether you are a landlord or a tenant, our team can provide you with the clear, practical advice you need to resolve a dilapidations claim.
Our recommendations for dilapidation claims
Whether you are a landlord or a tenant, we recommend:
- that you use a building surveyor with proven experience in dilapidations. If necessary, we can recommend one.
- that the dilapidations process begins before the end of the lease (typically within 3 to 6 months). A building surveyor will prepare a schedule of terminal dilapidations with the proviso that it is subject to change on discovering further dilapidations. The Schedule notifies the tenant of the breaches by clear reference to the terms of the lease. It also provides costings for undertaking any repair work and decoration.
Commercial rent arrears
Most commercial landlords will, at some time, have to deal with commercial rent arrears. How you approach this situation will depend on several factors.
Forfeiture of a lease
Forfeiture – often referred to as ‘re-entry’ – is the right of a landlord to bring a lease to an end if a tenant breaches any lease covenants. That includes non-payment of rent.
Commercial leases often provide a right of re-entry on the satisfaction of certain provisions. If nobody occupies the premises, peaceable re-entry for rent arrears is possible. In this situation, the landlord re-enters and changes the locks. In practice, most employ the services of a certified bailiff who attends with a locksmith. The bailiff attaches notices to the premises informing the tenant that the lease has ended.
It is important to remember that forfeiture ends the lease. So, the tenant is no longer liable for future rent payments. A landlord must, therefore, consider whether forfeiture is the best remedy for them commercially.
Only a court has the power, on the tenant’s application, to reinstate the lease. The tenant must pay the arrears and the landlord’s application costs. The tenant has up to 6 months after the lease forfeiture to apply.
If the tenant does not apply for relief from forfeiture, the landlord can bring a debt claim against the former tenant for the rent arrears.
Commercial Rent Arrears Recovery (CRAR)
CRAR allows a landlord to recover overdue rent without needing a court order if certain conditions are satisfied. Instead, the landlord instructs an enforcement agent to take control of a tenant’s goods and sell them at a public auction. The proceeds are set off against the outstanding rent.
CRAR abolished a landlord’s right of distress against his tenant.
The threat of removal of items essential to a tenant’s business may be a significant incentive for the tenant to pay the rent arrears. However, there is a risk that the required advance notice period allows a tenant an opportunity to remove valuable goods from the premises.
Another consideration for landlords is that by using the CRAR procedure, the landlord waives the right to forfeit the lease.
Drawing down on a rent deposit
Landlords may be able to draw down from a tenant’s rent deposit to recover rent arrears or other sums due under the lease. The landlord may need to provide notice of their intention to do this, and the tenant is usually required to replenish the funds in the rent deposit account.
In practice, this option may only provide a short-term solution. If the tenant has financial difficulties, they will unlikely replenish the funds in the rent deposit account.
Landlord pursuing a sub-tenant directly
If a tenant has sub-let the premises, a landlord can serve a notice on the sub-tenant requiring them to pay rent owed directly to the landlord rather than the tenant. The notice to the sub-tenant must set out:
- the amount of rent the landlord is entitled to recover from the tenant; and
- confirm that the sub-tenant must pay its rent directly to the landlord until the tenant’s rent arrears are paid.
Pursuing a tenant’s guarantor or previous tenant
Sometimes, a third party is a guarantor for the tenant, either at the start of the lease or on an assignment. If the tenant breaches its covenants under the lease, including arrears of rent, the landlord has the right to pursue the guarantor. This would involve the landlord issuing court proceedings to enforce those obligations.
Serving a statutory demand
A landlord can always serve a statutory demand on a tenant. If the tenant is a company, the amount owed must be more than £750 or more than £5,000 if the tenant is an individual. The tenant then has three weeks to make payment, failing which:
- the landlord can issue a winding-up petition for the tenant’s business or
- for personal bankruptcy.
Issuing court proceedings on a tenant
This option is suitable if there is a dispute over the sums owed, which is rare in the case of rent arrears.
Considerations
In deciding the most appropriate method of recovering commercial rent arrears, there will inevitably be a host of legal, practical and commercial considerations. The risk of using an inappropriate method of recovery and/or failure to comply fully with the necessary procedure means that it is always advisable for a landlord to seek legal advice before taking any action.
