Debt Recovery Procedures for Non-Payment of Rent

This note gives some brief guidance on the remedies open to landlords of property in Scotland in these circumstances. Debt Recovery Procedures for Rent Arrears A landlord can take steps to recover outstanding rent in the same way as any creditor who is owed money and Court proceedings can be raised for recovery of outstanding rent. Depending on the amount due, the action will be a Small Claim (up to and including 3,000) a Summary Cause (over 3,000 and up to and including 5,000) or an Ordinary Action (over 5,000). After obtaining a Decree (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, if the tenant has not made payment. Charge for payment

After the court has granted a Decree in the landlords favour, we can instruct Sheriff Officers to serve a Charge for Payment (Charge) if the tenant has not paid the sums due. A Charge is a formal notice served on the tenant demanding payment of the principal sum plus interest and expenses, including the Sheriff Officers fees. 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 tenants goods (as discussed below). Arrestment

Another option would be to serve an arrestment on the tenants 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 clients within hours of receiving their instructions and this has resulted in the tenant paying all the outstanding sums due to the landlord. An arrestment can be served at the same time as the service of a Charge or independently. Inhibition

An inhibition is a form of diligence over the tenants 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. An Inhibition does not allow the landlord to sell or take possession of the property. The main drawback with an inhibition is that, if the tenant is in arrears with his mortgage, the mortgage lender can repossess and sell the property. An inhibition will not prevent the lender doing so. An inhibition lasts for five years but can be renewed. An inhibition can be served at the same time as the service of a Charge or independently.

Attachment

After the expiry of the Charge, we can serve an attachment on the tenants moveable property. An attachment prevents the tenant from removing attached items from the place in which they were attached. When an attachment is carried out, Sheriff Officers prepare a schedule detailing the items that have been attached and their value. The Sheriff Officers will determine the open market value of the attached goods. A report must be given to the court within 14 days of the attachment and the tenant has an opportunity to object to the valuation given to the items. The tenant can redeem the attached items by paying the value determined by the Sheriff Officers within 14 days of the attachment. If he does not do so, the Sheriff Officers can make arrangements for the items to be auctioned. If the debtor, or anyone else in possession of the attached items, attempts to remove, sell or otherwise dispose of any of the items before these have been removed by Sheriff Officers, they will be in breach of the attachment and may be held in contempt of Court. An attachment lasts for 6 months, after which the items must be removed or auctioned, or the attachment will fall. All proceeds from an auction will be put towards the expenses and principal debt plus interest. If any articles are unsold, ownership will transfer to the creditor and the value of those items will be credited against any outstanding debt. Money Attachment

After a Charge has expired without payment, Sheriff Officers can enter a tenants 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. Sheriff Officers must submit a report to the Sheriff after the attachment and the landlord can then apply for a payment order. The Sheriff will consider any objections to the money being released to the tenant. Objections may come from people arguing that the money belongs to them and not to the tenant. Ultimately, the Sheriff must consider whether or not the attachment is unduly harsh in all the circumstances. If a payment order is granted, this gives authority for the funds to be released to the landlord. There are restrictions on the use of money attachment. Summary Diligence 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 sums due would have to be identifiable in terms of the Lease. Rather than passing an Extract Decree to Sheriff Officers, an Extract of the Registered Lease would be used. 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. At the same time as serving the Charge for Payment we could also seek an arrestment or inhibition (as mentioned above). 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. This currently costs 15.00 to obtain and takes a couple of days to process. This will authorise the current landlord to exercise summary diligence using the Extract Registered Lease. Before proceeding with Court action or summary diligence, we would normally send a 7 day Demand Notice to the tenant prior to any formal action.

Landlords Hypothec The landlords hypothec is a longstanding remedy, which gives the landlord security over certain moveable property on leased land or in leased buildings. The landlords 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. This will allow us to send out a notice exercising the right of landlords hypothec. The landlords hypothec gives a right in security for any rent that has not been paid at the date of insolvency. Irritancy 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. A landlord is entitled to take steps to recover outstanding rent after the tenant has left the property without having to enforce the tenants other obligations under the Lease. The Lease allows the landlord to recover possession of the premises, but it also crystallises the tenants liabilities. This is often no bad thing if the tenant is not able to pay the outstanding arrears, let alone meet future rental payments or other liabilities. 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 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 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 tenants breach. Conclusion 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 contact:Edinburgh: Euan McSherry Kenneth Campbell Philip Knight 0131 474 2309 euan.mcsherry@dwfbiggartbaillie.co.uk 0131 474 2419 kenneth.campbell@dwfbiggartbaillie.co.uk 0131 474 2402 philip.knight@dwfbiggartbaillie.co.uk

Glasgow: Lynne Calder 0141 228 8194 lynne.calder@dwfbiggartbaillie.co.uk

The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.