The law of leases is complex. What follows is a broad summary, but you should always get advice specific to your circumstances. In addition, a number of temporary measures have been introduced as a result of Covid-19. Separate advice should be taken on these
It is generally in the landlord’s interests to have a commercial property lease registered for preservation and execution – registration makes the landlord’s life much easier in the event that they are required to take further action against a tenant in the future to recover any monies due. If a commercial lease is registered then the landlord will usually be allowed to immediately take enforcement action against a tenant who fails to pay rent.
In Scotland, only commercial leases for longer than 20 years can be registered in the Land Register. Section 17 of the Registration of Leases (Scotland) Act 1857 provides that a lease which contains an obligation(s) to renew which would extend the period of the lease to more than 20 years is registerable. Registering a lease essentially establishes notice of the lease to all parties and for all purposes.
In England, leases of more than 7 years must generally be registered at the HM Land Registry. The tenant will usually be responsible for doing this within 2 months of the lease creation.
If a lease is not registered, then it will not be a valid legal lease. Rather, it only takes effect as a contract. The tenant will not have a legal title to the property. If the landlord sells the property, the lease will not bind the purchaser and will remain a personal contract between the original landlord and the tenant.
Another consequence of not registering a lease is that a landlord may not be able to recover unpaid rent from the guarantor if the tenant fails to pay.
Essentially, failure to register a registerable commercial lease reduces the landlord’s options.
Where a limited company enters a lease it’s directors will be given the protection afforded by limited liability. This means that should the company fail to pay rent, there is generally no personal liability of directors to pay nor will they generally be held legally responsible for breaching the terms of the lease. However, in cases where a company enters a lease in its own name, the landlord may require a director to sign a personal guarantee which effectively removes the protection afforded by limited liability. For example, if a personal guarantee is obtained by the landlord and the company becomes insolvent, any directors party to the guarantee will be held personally liable.
In contrast, an unincorporated business such as a sole trader or partnership, will not be afforded limited liability. Personal liability will therefore arise in the case of non-payment of rent. Click HERE for more information on legal entities.
Where a commercial tenant falls into rent arrears in Scotland, there are various options available to a landlord.
A landlord may terminate the lease under an irritancy clause. With regards to statutory irritation, the tenant must be in 2 years of rent arrears and the landlord must give the tenant at least 14 days’ notice before being able to irritate the lease due to non-payment of rent or other sums due. If the tenant pays the sums due within this 14-day period then the landlord can no longer proceed to irritate the lease.
A landlord can use their powers under the landlord’s hypothec. Click HERE to read more about landlord’s hypothec.
A landlord can bring a claim to the Sheriff Court, to recover the rent arrears. If successful, the court will grant an order (decree). Credit reference agencies will be notified, thereby affecting the tenant’s ability to obtain further credits.
If a landlord has obtained a decree against the tenant, the landlord can send them a charge for rent, which usually gives the tenant 14 days to pay the debt. If the 14 days expires and no payment has been made, the landlord is generally able to instruct Sheriff Officers to seize money held in the premises. However, where the lease is registered in the Books of Council and Session, the landlord is usually permitted to take immediate enforcement in cases of non-payment of rent.
If the tenant owes the landlord over £3000, the landlord may be able to begin proceedings against them for insolvency (where the tenant is a limited company) or sequestration (where tenant is an individual).
In certain circumstances, a landlord is able to re-enter commercial property following a tenant’s breach of a provision in the lease. This is known as forfeiture. There are two options available to a landlord – forfeiture by peaceable re-entry or by issuing court proceedings.
Forfeiture by peaceable re-entry is where the landlord re-enters the property and seizes the premises immediately. This is commonly enforced by a certified bailiff who attends the premises with a locksmith to change the locks and affix notices to the premises to inform the tenant that the lease has been ended.
Alternatively, the landlord can issue court proceedings for forfeiture immediately if the breach is for non-payment of rent, otherwise the action can be raised after a notice has been served.
To forfeit a lease successfully, a landlord must establish his or her right to do so, otherwise the tenant may be able to bring a claim for wrongful forfeiture. If the breach is for something other than unpaid rent, the landlord must serve a written notice pursuant to s146 of the Law of Property Act 1925. Following the notice being served, if the tenant fails to remedy the breach within a reasonable time or fails to pay compensation to the landlord, the landlord is generally entitled to seek forfeiture of the lease by either peaceably re-enter the property or issuing court proceedings
However, if an insolvency event occurs, such as a tenant going into administration, a landlord’s right to forfeit may be restricted. This restriction can occur even where the landlord has already begun taking steps to issue forfeiture proceedings.
Similarly, a landlord may lose their right to forfeit a lease where they have taken steps that recognise the continued existence of the lease. For example, by demanding rent from the tenant which falls due after the relevant lease provision has been breached.
Once a lease is forfeited, a tenant, sub-tenant or mortgagee may apply to the court for relief from forfeiture which, if successful, may re-instate the lease or order relief on certain conditions.
The content of this website is for general information only and should not be relied upon. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice.