Property management in the recession – a landlord’s perspective


Author: Alison Mould


Following our recent seminar on property management in the recession, this article outlines some of the key points as a reminder to landlords that proactive management can be very beneficial. The seminar highlighted many issues that Alison Mould and Jonathan Hibberts, partners in the firm’s property litigation department, have experienced on a day to day basis when acting for landlords, and the seminar reminded landlord clients of some often unused weapons in any landlord’s armoury. The highlights of the seminar were as follows:

Tenant arrears

Statutory demands were thought to be preferable to the more lengthy and often more costly county court proceedings. If a property is sublet then landlords should not forget their ability to rely on section 6 of the Law of Distress (Amendment) Act 1908 and, if the current tenant is an assignee, then landlords were reminded that notices under section 17 of the Landlord and Tenant (Covenants) Act 1995 must be served within six months of a debt falling due, failing which an assignor or an assignor’s guarantor could totally avoid liability for a fixed sum.

Tenants in administration

Other forms of insolvency such as liquidation, CVAs and administrative receiverships are less prevalent. Administrations have the added benefit that they create a moratorium and disable creditors from taking any action against the company without either the permission of the administrator or the leave of the court. Landlords were reminded that if administrators return the keys to them and they do not want to accept them by way of a surrender, then they should write back to the administrator indicating this. An administrator cannot unilaterally surrender a lease. Often administrators will give landlords written permission to retain keys without that retention amounting to a surrender or forfeiture, giving them the specific ability to use the keys for marketing purposes. In due course, if a new tenant can be found, then administrators are usually only too willing to agree a surrender. If administrators use the premises for the purposes of the administration, then they could be liable for the rent as an expense of that administration. Jonathan Hibberts explained how, and for what period of time.One of the other issues raised was the fact that many landlords’ insurers require vacant premises to be efficiently closed down, with mains services etc. being sealed off. Again, administrators seem fairly willing to allow landlords to use keys for the purposes of complying with any insurance requirements without the use of the keys in that manner effecting a surrender or forfeiture.Forfeiture was also considered by the speakers. Whilst used infrequently at the moment landlords were reminded of the difference between once and for all breaches and recurring breaches of covenant, and the importance of ensuring that a right to forfeit was not waived by a landlord by treating the lease as continuing.

Break notices

In the current climate the use of break clauses by tenants is more prevalent. Indeed many tenants are attempting to exercise break clauses even where they want to remain in the premises, simply to force the landlord to renegotiate the terms and, in particular, the rent due. Whilst it is important to ensure that a tenant has prepared a valid notice and has served that notice in accordance with the terms of the lease, it is also important from a landlord’s point of view to consider very carefully whether a tenant has complied with any preconditions within a break clause, e.g. to pay all the rents due under the terms of the lease and to comply, substantially or otherwise, with its covenants. Landlords were also reminded to ensure that they did not waive the tenant’s obligation to comply with conditions in break clauses.

Rates

Business rates are often an issue for landlords. In the recession of the early 90s a tenant was described as “someone who pays the rates”; it is, however, equally important today. The law allows one rate free period of three months in between lettings. There have been various “schemes”, some perhaps more lawful than others to entitle a landlord to a further rate free period. “Meanwhile” leases may well achieve this where properties are genuinely let rent free to solvent tenants who then pay the rates, on short term excluded leases. Alison Mould also advised that landlords should ensure that in new leases a tenant covenants that at the end of the term it will not use up the rate free period, thereby allowing the landlord to use it in any subsequent void. The tenant’s covenant also went on to indemnify the landlord against any loss suffered if it did inadvertently use up that rate free period.

Licences to assign

The seminar reminded landlords of the statutory obligations on them when dealing with licences to assign and the drastic consequences of non compliance. In a nutshell, a landlord has a reasonable time from receipt of a sufficient application to consider that application from its tenant for licence to assign, to make a decision that it will either permit the assignment, permit the assignment with conditions, or refuse the assignment and communicate that decision to the tenant. A sufficient application can be simply the name of the proposed assignee be that a company or individual. A reasonable time, according to the Court of Appeal, is three weeks from receipt of a sufficient notice or a shorter period if the tenant shows why the issue needs to be dealt with urgently. This three week period is not extended by a request for references, completion of a landlord’s standard form, asking for copies of accounts, or waiting for solicitors’ undertakings for costs.The final really pertinent point that was made in the seminar related to the service of non hostile section 25 notices by landlords. Since the amendment to the Landlord and Tenant Act 1954 in 2004, interim rent can go down as well as up. In the past, landlords have, as a matter of course, served section 25 notices when they reach the end of a tenancy to encourage the tenant to negotiate. However, in a falling market like we have at the moment, this may mean that a landlord is creating an entitlement to interim rent which is less than the passing rent. If a landlord finds itself in that situation, it should simply allow the tenant to remain in occupation and trading on the contractual termination date of the lease, and allow it to “hold over” without serving a notice. If terms can be agreed on a without prejudice and subject to contract basis then that lease can be entered into without the need for notices. A well advised tenant will, however, serve a section 26 request.

Alison J Mould, partner, Fladgate LLP (amould@fladgate.com)

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