In an ideal world, when signing a new lease for a commercial property you would hope that everything goes smoothly through to when the lease expires and it’s time for renewing. Unfortunately for some, this is not always the case.

If you are a tenant, business can be quiet which could result in a missed payment, or if you are a landlord, you could find your tenant has changed part of the premises and breached the lease contract.

In both cases repossession could be the result. However, as simple as it is to say what the outcome could be, the process of repossession is far from straightforward.

Here, Emyr Pierce details the process and issues of commercial property repossession.

What is repossession?

In short, repossession is the end of a tenancy before the term of lease expires. This could happen from the reasons mentioned above.

There are two ways a property can be repossessed. The first option is to forfeit the lease, which can be done under common law and is known as ‘peaceful repossession’. This means no court proceedings, whilst the second option would mean going to court to obtain an Order of Possession.

Peaceful Repossession

In most commercial property contracts there will be a clause that states a landlord can re-enter the property and take possession if the contract is breached. If this is the case and the landlord wants to take the ‘peaceful’ route then notice must be given to make the public and tenant aware that the property is being repossessed.

Peaceful repossessions usually take place outside of work hours to ensure no one is in the property. This usually involves changing the locks and doing an inventory check

If done properly, a peaceful repossession is an efficient way of dealing with tenants and there will be no court costs to pay.

Order of Possession

If in the case where the tenant is a difficult, a landlord can go to county court to gain an Order of Possession. This can also be the safest route as it follows proper court proceedings.

A landlord who wishes to instigate repossession can serve a Section 146 notice. The notice must specify the breach of contract, whether or not it can be remedied, and state any compensation requirements.

Once the notice has been issued, the landlord must give a window of opportunity to remedy the breach, if it is remediable. If the leaseholder fails to do so then court proceedings will follow.

Tenant’s Rights

Though there are different options for landlords, it is important to note the tenant’s rights as well. If an Order for Possession is filed, the tenant has the right to file for relief and in some cases, these can be granted if the tenant has paid the backdated rent or remedied the situation.

Another point to note, whether you are a tenant or a landlord, is if breach of contract was noticed but the tenant continued paying as normal, the landlord’s right may then be waived and the case will be in the tenants favour.

Repossession can be a complicated matter that involves many factors, which is why it is important to look for independent legal advice from a commercial property specialist to make clear of the situation.

Be it an expanding business or changes to income, there are many reasons you may wish to end your commercial lease or decide not to renew.

Can I end my tenancy early?

It depends both on your landlord, and the terms that you agreed to in your lease; tenants are advised to consult a solicitor. Ways in which you may be able to opt out of a tenancy earlier include:

1. Your landlord accepts the termination of the lease.
2. You find someone else to take over your lease. You should note that your landlord is within their rights to ask you to be the guarantor for the new tenant, meaning that continuing liability to the landlord is a prospect.
3. Your lease includes a ‘break clause’ which would allow you to end your lease early.
4. You are able to sublet, although you will still be liable for the rent.

What happens if I do not wish to renew my commercial lease?

The first thing to do is check whether your lease states that you are subject to The Landlord and Tenant Act 1954. If your lease is ‘outside The Act’ then your lease will not automatically be renewed anyway and you therefore you just need to tell your landlord that you do not plan on staying. If you are ‘inside The Act’ then you have two options:

1. On the contractual expiry day vacate the property and the lease will come to an end.
2. You can serve a section 27(1) notice on the landlord, giving a minimum of three months’ notice, expiring at the lease end, that you are intending to vacate. However, if you do this and then do not leave, you will become a trespasser.

Note that you, as a tenant, have no obligation to inform your landlord that you are intending to vacate. If your landlord asks you whether you plan on staying, his only option is to begin proceedings for the grant of a new lease.

 

What if I want to end my lease shortly after the renewal date?

You must give a minimum of three months’ notice and serve a section 27(2) to the landlord. Please note that previous rules where the notice had to end on a quarter day no longer apply and so the notice can end on any day; but there are rules for apportioning any rent that has been paid in advance.

During a lease contract, some commercial landlords will come across a tenant who misses a rental payment.

Prior to 2014, a landlord was able to exercise distress if a tenant was in arrears. This meant a landlord was able to quickly seize tenant’s goods without having to give prior notice. Usually, as a bailiff would just turn up and seize goods, this would encourage the tenant to pay the arrears without the goods having to be sold.

Due to objections to landlords exercising distress, it was replaced by Commercial Rent Arrears Recovery (CRAR).

CRAR is more complex in comparison to exercising distress as one of the requirements includes having to serve prior notice before goods are seized.

Below, Emyr Pierce answers the most frequently asked questions when it comes to CRAR.

Which tenancies are covered by CRAR?

CRAR only applies to tenants of commercial properties. Mixed-use (commercial and residential) properties are not included unless they are under separate leases.

What is covered in CRAR?

CRAR only recovers rent with interest and VAT. Unlike distress, CRAR does not cover service charge, maintenance, insurance or other supplementary charges.

How much can be seized?

The first £1,350 worth of tenant’s goods is exempt from CRAR. All items above the limit, including computers and vehicles, can be seized, unless they are leased items.

Does notice have to be given?

Yes, with CRAR a ‘notice of enforcement’ is required and a landlord is obligated to give at least seven days’ notice, excluding Sundays Bank Holidays, Good Friday and Christmas.

The ‘notice of enforcement’ gives tenants the opportunity to pay the arrears to prevent the ‘enforcement agent’ turning up, however this is also one of the disadvantages of CRAR as landlords believe tenants can move goods away so they cannot be seized. If a landlord believes this, they can apply to court for a shorter notice period but this is more costly as it involves more administration.

What is the general procedure?

After notice is given, CRAR can then be executed by a certified enforcement agent. The agent does not require a warrant provided he does not use force. The agent can then enter the premises anytime between 6am and 9pm, 7 days a week, or any other time provided it is within the tenant’s business hours.

Once the enforcement agent is on the premises, the goods must then be secured and removed from the premises (or vice versa), or the tenant and agent can sign a ‘controlled goods agreement’. This mean tenants retain custody of goods, acknowledges the agent is taking control, and agrees not to remove or dispose before the debt is paid.

Once seized goods are obtained and secured, the enforcement agent must give seven days’ notice. Goods will then be sold at an auction for the best price than can be reasonably obtained.

Other Important Information

• It is important to note that if the route of CRAR is taken, a landlord waives their right to repossession.
• If a tenants is are going through administration or liquidation, a statutory moratorium prevents the use of CRAR.

CRAR is a good option for landlords to take if a tenant falls into arrears and wants to recover pay. It is always advised to seek independent legal advice from a commercial property specialist to help understand the issue and to find out what the best options are.

With house prices at an all-time high, renting is fast becoming a more popular and cost effective way to occupy a commercial property.  That being said, you need to be aware of rent reviews and how they can affect you and your business.

 

What is a rent review and what is their purpose?

A rent review is the mechanism which enables rent prices to alter in accordance to the market level at the review date. The reviews typically happen every three to five years, but be sure to check the terms of your lease as the time frame can vary.

How will I know if a rent review is activated?

Usually you will be notified by your landlord who will quote the new figure for the upcoming rent period. If the tenant deems this unreasonable, they must say so in writing as soon as possible and can ask what the grounds for the increase is based upon. It is important that you highlight any queries as soon as possible as there are often strict deadlines to adhere to which, when missed, may result in the tenant having to pay the new price without being able to dispute it.

What is the review based on?

The determining factors should be specified in the lease agreement. Usually, the new rent value is based upon open market rental value which is basically the rent the landlord could reasonably expect to receive for the premises if it were leased to a third party. It will be affected by the general rent levels of similar properties in the area and if your lease allows you to use the premises for a variety of purposes, the open market rental value will be calculated as if it is being used for its most valuable purpose.

What if I can’t afford the new level of rent?

The first step is to try and negotiate with your landlord. If a resolution cannot be found then the lease usually stipulates the involvement of a third party, such as a chartered surveyor, to resolve the disagreement.

If this doesn’t work, check if your lease includes a ‘break clause’ which allows you to surrender the property to the landlord. You may also be able to sell the lease to someone else or sublet part of the premises. Failing that, landlords will often find a compromise rather than chase you for money.

Top tips:

Read your contract! It may sound basic but make sure you read the fine print and find out if and when you will be subject to a rent review. Typically, rent reviews are done every three to five years for long-term leases but there may not be any rent reviews for short-term leases.

Trust the experts – it is someone’s job to deal with these things and they will be able to advise you towards the best solution.

Pay attention to deadlines – you don’t want to miss you time slot to negotiate or dispute a rent review

Document it – once the review has been settled, make sure you have signed documentation to prove that the review has been agreed and formalised.

‘The Act’- the Act being referred to is The Landlord and Tenant Act 1954 which gives business tenants automatic renewal when a lease expires.

When agreeing to terms for a new lease, be aware whether the lease is inside or outside The Act or you could be in for a nasty surprise.

Inside The Act

Having your commercial lease inside the act will offer you, as a tenant, protection. It means that when your lease has expired your landlord cannot ask you to leave which, along with the inconvenience, could subsequently have a negative impact on your business. Moreover, when negotiating a commercial lease, if the landlord is adamant he will only accept a tenancy outside of the act (meaning you would have no automatic renewal rights as a tenant) you should consider whether the possibility of being forced to leave would be worth it or if you could secure a longer lease term with the landlord.

Outside The Act

The main benefit to the landlord of a lease which is outside of the act is the freedom they will have to do with the building as they please when the lease is over.  The landlord may wish to renegotiate the terms of a new lease with the existing tenant or with a new tenant or may even wish to take possession of the building for their own purposes, which would be a violation of the 1954 Landlord and Tenant Act if the lease was inside the act.

Are there any exceptions whereby my landlord could end my lease even if I am inside the act?

As with most contracts, there are exceptions. As a tenant, you may be in breach of your lease if your rent is in arrears or the premises are in a state of disrepair. The landlord may use this chance to repossess the premises for their own use or to take time to develop and improve the site. Even with these exceptions, tenants and landlords should be aware that the landlord needs to follow a set notice procedure and cannot suddenly evict the tenant if they are inside the act.

For many, signing a new lease can be an unnerving experience, particularly if it is the first time you’ve rented a commercial property.

Often an exciting but daunting time, it’s important to really understand the lease before you sign, and to be aware of the main pitfalls that can sometimes cause problems for tenants further down the line.

Here, Emyr Pierce highlights the main points to consider when leasing a commercial property:

How long are you likely to remain in the property?

Planning ahead is essential when it comes to any business, and the same should apply when taking on a new commercial property. If your business plan involves upsizing or relocating, it doesn’t make sense to sign a long-term contract that will tie you in for years to come.

Can you transfer or sell the lease?

Many tenants wrongly assume that they can assign their lease onto someone else during their lease term. Most often, leases actually prohibit assignment, and even if they don’t, you will usually still be responsible for the new tenant and how they comply with the lease. There may possibly be the option to underlet, but this can be restricted also on many leases.

Will the rent change during the lease term?

Tenants should be aware that periodic rent reviews are commonplace during commercial property leases. More often than not, this means that the rent charges will increase. Keep an eye out for rent reviews that seem overly frequent; a good solicitor can ensure this doesn’t happen.

Who is responsible for repairs?

The vast majority of commercial leases are set up so that it is the tenant’s responsibility to pay for and organise any repairs to the property, and to organise insuring of the premises. Each lease can vary considerably, so what would be the tenants responsibility on one lease, might not be on another. Ensure that the terms and conditions are fully understood before signing anything.

How easy it to terminate the lease?

Break rights exist in many leases, but not in all. Even where a break right exists, tenants must realise that the landlord may share just as many rights in terminating the lease as the tenant does. Tenants must ensure that all details relating to the ability to break the lease are completely understood and fit in with their long-term plans

Commercial leases might sound like a bit of a minefield, and in some cases, they are, but with the right advice, it can be an easy and enjoyable process. Deciding on business premises can be a tricky process in itself, so make sure you aren’t caught out on minute details when it comes to signing the deal. It is always advised that you seek the advice of a commercial property specialist as to ensure that you don’t leave yourself open to litigation further down the line should disputes arise.