In Scotland, a landlord can take steps to recover outstanding rent in the same way as any creditor who is owed money, and where a Lease has not been registered for execution (see below) court proceedings can be raised for recovery of outstanding rent.
After obtaining a decree (or judgement) for the sum due, there are a number of steps that can be taken to recover the outstanding rent, together with interest and Court expenses.
Charge for payment
After the Court has granted a Decree in the landlord's favour, we can instruct Sheriff Officers to serve a Charge for Payment ("Charge"). If payment is not made within 14 days, the tenant is deemed to be apparently insolvent and an action for sequestration (bankruptcy) can be raised against an individual or a partnership, or you can begin winding up proceedings against a company. After serving the Charge, the Sheriff Officers will normally provide a report indicating whether there are prospects of recovering the outstanding sums by another means; for example, by attaching the tenant's goods (see below).
Another option is to serve an arrestment on the tenant's bank account(s). This has the effect of freezing the funds in the account(s) at the time of service of the arrestment and it prevents the tenant using those funds until the arrestment has been lifted. We have previously arrested bank accounts on behalf of landlord's within hours of receiving their instructions and this has resulted in the tenant paying all the outstanding sums due. An arrestment can be served at the same time as the service of a Charge or independently.
An inhibition is a form of diligence over the tenant's heritable property. When an inhibition has been put in place, this prevents the tenant dealing with his property. The tenant cannot sell or otherwise transfer ownership of the property or take security over it, until the inhibition has been lifted and, in practice, the landlord will not lift the inhibition until the debt has been paid.. A drawback of an inhibition is that, if the tenant is in arrears with his mortgage, the mortgage lender can repossess and sell the property. An inhibition can be served at the same time as the service of a Charge or independently.
After the expiry of the Charge, we can serve an attachment on the tenant's moveable property. An attachment prevents the tenant from removing attached items from the place in which they were attached. Sheriff Officers will determine the open market value of the attached goods and provide report to the court. The tenant can redeem the attached items by paying the value determined by the Sheriff Officers. If he does not do so, the Sheriff Officers can make arrangements for the items to be auctioned.
After a Charge has expired without payment, Sheriff Officers can enter a tenant's premises and attach money and other items like cheques and postal orders held on the premises (for example in tills and safes). There is a presumption that any money held on the premises is owned by the tenant. If a payment order is granted, this gives authority for the funds to be released to the landlord.
If the Lease contains a clause giving consent to registration for execution (and most Leases do), an Extract of the registered Lease will have the same effect as a Court Decree. In other words, the steps that can be taken to try and recover the outstanding sums on the basis of a Court Decree can also be taken as a result of an Extract of the Registered Lease. The benefit of this is that the landlord can act quickly to recover outstanding rent and avoid the time and expense involved in pursuing Court proceedings. We have used this method to great effect on behalf of a number of our clients.
If the current landlord is not the original landlord as narrated in the Lease, it will be necessary to have the Lease sent to the Court of Session for a section 88 warrant which authorises the current landlord to use the Extract Registered Lease.
The landlord's hypothec is a longstanding remedy, which gives the landlord security over certain moveable property on leased land or in leased buildings. The landlord's hypothec has been restricted substantially by recent legislation. In practice, this right will be of no use to the landlord unless the tenant becomes insolvent.
In that event, the landlord will be entitled to be paid out of the proceeds of sale of items covered by the hypothec in preference to other creditors. It is important to notify us as soon as possible after becoming aware that a tenant has become insolvent. The landlord's hypothec gives a right in security for any rent that has not been paid at the date of insolvency.
If a tenant is in breach of any terms of the Lease, including provisions for payment of rent, it is open to the landlord to terminate the Lease early, and this is known as irritating the Lease. Most Leases have a provision covering irritancy. The landlord must give the tenant notice that he intends to bring the Lease to an end and the relevant provision often outlines the steps that have to be taken in order to irritate the Lease.
In the current financial climate, landlords are understandably not always keen to bring Leases to an end, given that it might be difficult to find a replacement tenant. We regularly advise clients on whether irritancy might be appropriate in their particular circumstances and take this step where it is commercially in our clients' interests to do so. Irritancy should always be viewed as a final step and should not be done without careful consideration.
Guarantees can be another useful route open to a landlord. If the landlord has the benefit of a guarantee from a parent or group company, it is open to the landlord to enforce the guarantee against that company in respect of tenant's breach.
It is worth mentioning that if the tenant company is in administration, the landlord will not be able to pursue recovery without the consent of the administrator. The administrator is unlikely to give consent and, although the landlord can apply to the Court for permission to take action, the Court will give the administrator an opportunity to be heard before reaching a decision.
If a landlord becomes aware that the tenant is having difficulty meeting rental payments, as with any other debt, it is best to act promptly in order to attempt to recover arrears before the situation gets any worse.
Every case is different and we are happy to advise on the appropriate remedies in each scenario to ensure maximum recovery.
For more information please Philip Knight, Senior Solicitor.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.