2020-02-16
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Agricultural landlord and tenant: recovering rental arrears

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Posted by Alex Robinson on 23 May 2016

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Alex Robinson Partner - Head of Agriculture

Renting farm land: Tenants of agricultural and rural land will almost always be obliged to pay a rent to their landlord for their occupation of the land. The obligation to pay rent will form one of the tenant’s overhead costs.

In times of rising global competition, falling domestic wheat and grain prices and the Rural Payment Agency delaying, or in some circumstances, reducing the value of Basic Payments (formally Single Farm Payment), many tenants are unable to cover their overheads and are falling into arrears of rent.

A landlord can deal with a tenant who has fallen into arrears in a number of ways. Each of the landlord’s options have inherent advantages and disadvantages, which the landlord should consider before deciding which approach is most appropriate.

A landlord should consider all of the options before deciding which approach to take. The purpose of this note is to briefly explain the options which may be available to a landlord of an agricultural tenant.

Forfeiture

Forfeiture will only be an option, if the landlord has reserved in their tenancy agreement, an express right to forfeit their tenant’s tenancy for non-payment of rent.

By forfeiting the tenant’s tenancy, the landlord will immediately bring the tenant’s right to occupy the holding to an end. Depending on the terms and type of tenancy, the tenant’s tenancy may be forfeited by re-entering and securing the holding, or by Court proceedings for a declaration that the tenant’s tenancy has been forfeited and the landlord is entitled to possession of the holding.

For a landlord seeking to recover their tenant’s arrears, forfeiture offers an opportunity to (a) put the tenant under pressure to repay their arrears; and (b) if those arrears cannot be repaid, recover possession of the holding and crystallising the landlord’s losses.

By forfeiting their tenant’s tenancy and recovering possession of the holding, the landlord will  resume responsibility for all rates and utilities connected with the holding. However, resuming possession may be an advantage to the landlord if the rental market is particularly buoyant and the landlord can secure a new tenant on a higher rent or requires the land for himself or redevelopment.

Landlord’s should be made aware that a tenant of a forfeited tenancy has a statutory right to apply to Court for relief from forfeiture. To obtain relief from forfeiture, the tenant will have to (a) apply to Court for relief; and (b) pay the arrears and the landlord’s costs in full.

To identify whether forfeiture is an option, a landlord will need a solicitor to: (1) briefly review the terms of the tenant’s tenancy; (2) advise on the process by which the tenant’s tenancy may be forfeited; and finally (3) consider the surrounding circumstances and assess whether, despite the tenant’s default, the landlord has waived  his right to forfeit.

Forfeiture will not be the right option for all landlords. For a more detailed explanation of forfeiture and the process involved, you may wish to read our article [Agricultural Landlord and Tenant : Forfeiture].

Court proceedings

A landlord may issue Court proceedings to obtain a judgment debt for the rent arrears owed by a tenant. A judgment debt is an order produced by the Court that confirms the extent of the debt owed by the tenant to the landlord.

To commence Court proceedings, a claim form, specifying the basis upon which the debt is owed must be issued at Court and served on the Tenant. Following receipt of the claim form,  the tenant will have between 14-28 days to file a defence to the claim. If the tenant fails to defend the claim, the landlord can apply to the Court for judgment to be entered in default.

The costs of issuing Court proceedings for a judgment debt vary depending on the size of the debt. The timescales depend on whether the tenant files a defence and contests the landlord’s right to payment of the debt.

Once the judgment for the arrears has been entered it will be noted against the tenant’s credit rating. The implications for this depend on the tenant’s circumstances, and often, whether they intend to apply for credit.

The landlord will then have a number of options to enforce the judgment which include obtaining a charging order to secure the debt against the tenant’s home; or asking for the tenant to attend Court to provide details of their income and expenditure.

The advantages of issuing Court proceedings to enforce the debt are that (a) since the landlord is not seeking possession for the holding, the tenant’s tenancy  will continue; and (b) it may entitle the landlord to enforce the debt by applying for a third party debt order, or securing the debt by obtaining a charging order against the tenant’s home.

Unfortunately, the process is capable of becoming protracted and therefore expensive, particularly if the tenant disputes that the arrears are owed or claims that the landlord is also in breach of one of the terms of his tenancy.

Obtaining a judgment for the arrears will not, in itself, force the tenant to repay the arrears. If the tenant has no property for the debt to be enforced against, and if the tenant is not concerned with his credit rating, a judgment may not persuade the tenant to repay the arrears.

Insolvency proceedings

Where an individual owes more than £5,000 of arrears, or a limited company owes more than £750, the landlord may petition for the bankruptcy or the winding-up of the tenant. The landlord will hope the threat of bankruptcy will be sufficient to persuade the tenant to repay their arrears because the consequences of defaulting are severe.

A bankruptcy or winding-up order, made following the presentation of a petition, will have different effects on an individual or limited company.  The defaulting tenant will have either their assets vested in a liquidator or trustee in bankruptcy pending an investigation into their financial affairs. Often these consequences are debilitating for any business.

In relation to an individual, a bankruptcy petition must be preceded by the service of a statutory demand for payment. That statutory demand will provide the tenant with 21 days’ to repay the arrears. If the tenant defaults the landlord may present a petition for the tenant’s bankruptcy.

A landlord does not need to serve a statutory demand on a limited company before presenting a winding-up petition; despite this, a landlord will often send the tenant a demand explaining that a petition to wind up the tenant will be presented if the arrears are not repaid within a short period.

Often, the threat of insolvency proceedings will be sufficient to persuade a tenant to repay the arrears. Insolvency proceedings are however only viable if the arrears are not in dispute. If the tenant contests that the arrears are due, the Court will refuse to grant a bankruptcy or winding-up order and may award costs against the landlord.

In summary, the advantage of the using the insolvency proceedings to encourage the tenant to repay the arrears are that, due to the severe consequences if the tenant does not pay the arrears, the threat of insolvency proceedings is often very persuasive. The disadvantage is that (a) the debt must not be in dispute; (b) if the tenant concedes that the arrears cannot be repaid and submits to the bankruptcy or winding up petition, the landlord may eventually, once the administration of the bankruptcy or winding up has been completed, recover only a small percentage of the arrears or none at all.

Commercial rent arrears recovery

On 6 April 2014 the common law right to distress was abolished and replaced with the commercial rent arrears recovery (CRAR); a regulated process through which the landlord can arrange for certified bailiffs to enter their tenant’s premises and seize goods, which may be sold to cover the arrears of rent. The process has a number of limitations that makes it unsuitable for many landlords who are attempting to recover rent from their tenants.

Commercial rent arrears recovery may not be used to recover rent arising from a tenant’s occupation of a residential property. CRAR’s use is limited to recovery of rent arising from a tenant’s occupation of commercial premises and agricultural land and farm buildings, but it cannot be used to recover rent connected with a farmhouse.

Commercial rent arrears recovery may be used to recover rent, any VAT and interest. Commercial rent arrears recovery may not be used to recover insurance or service charge arrears, even if those charges are reserved as rent under in the tenant’s tenancy.

The process permits a certified enforcement agent to enter the holding for the purpose of seizing goods. Before the goods are seized, the landlord must ensure the tenant is served with a written notice warning him that his goods may be seized. The requirement to serve notice has been observed by commentators as rendering commercial rent arrears recovery as method of recovering rent,  as toothless, since a forewarned tenant may simply remove his belongings from the holding prior to the arrival of the bailiff.

The bailiff may only seize goods belonging to the tenant that are of a value sufficient to repay the rent arrears. The enforcement agent is not permitted to seize goods that are used by the tenant for their trade or business. Agricultural tenants will commonly not retain on the holding premises personal goods of any significant value; those goods which are on the holding are likely to be leased or subject to some form of hire purchase agreement. In many cases, commercial rent arrears recovery will not offer a landlord of an agricultural tenant a viable method of rent recovery.

Rent deposit deeds

A rent deposit is a sum of money paid by a tenant to a landlord as security for the sums to be paid to the landlord under the terms of the tenancy. The circumstances in which monies may be drawn against the deposit are recorded in a rent deposit deed.

Persuading a tenant to pay a deposit and enter into a rent deposit deed at any time other than prior to the tenant taking a tenancy of the holding  is extremely difficult. If the landlord did not take a rent deposit from the tenant prior to the grant of a tenancy, it will be highly unlikely that there will be a deposit to draw arrears from.

If a rent deposit is available, the advantage is that the arrears will be repaid relatively quickly and conveniently. The disadvantage is that the landlord will be reducing the security retained to cover future arrears. There is usually an obligation on the tenant to maintain or to top up the level of rent deposit following a withdrawal. In practice, it is often difficult to persuade a tenant to top up a rent deposit following a withdrawal.

A landlord may decide that drawing against the rent deposit should be a last resort and decide to adopt one of the other approaches first. 

Guarantors and former tenants

Guarantors and former tenants will often be a party to the original tenancy, or will have provided a guarantee, promising to pay the landlord in circumstances of the tenant’s default.

The landlord’s ability to pursue rent arrears will depend on whether the tenancy is a “new tenancy” or “old tenancy” under the Landlord and Tenants (Covenants) Act 1995 (“the 1995  Act”).

To demand the arrears from the guarantor or former tenant, the landlord will need to serve on the guarantor or former tenant a Notice under the 1995 Act. The landlord will only be able to recover arrears that are less than six months’ old. A landlord will therefore have to act quickly to ensure a notice is served within six months’ of the tenant’s rent falling due.

The advantage of pursuing a guarantor or former tenant, is that the guarantor/former tenant, may have deeper pockets and be able to repay the arrears quicker than the tenant.

The disadvantage is that, if the guarantor or former tenant refuses to pay, the landlord will have to consider implementing court or insolvency proceedings to persuade the guarantor or former tenant to repay the arrears which may make the process protracted. 

Conclusion

Recovering rental arrears from an agricultural tenant may on the face of it appear to be a straight forward exercise, however, the options available to the landlord are varied and each have their own particular advantages and disadvantages. So as to avoid any unnecessary delays, and the landlord unwittingly waiving his rights, the landlord should obtain advice and consider their options before taking any steps and renting farm land.

all images adapted from freepik.com

About the author

Alex Robinson

Partner - Head of Agriculture

Alex specialises in non-contentious property matters for agricultural clients.

Alex Robinson

Alex specialises in non-contentious property matters for agricultural clients.

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