What other options do they have?
When compared with premises in England and Wales, the remedies for landlords in Scotland are much more limited.
However, they also provide additional security. If your business falls into arrears with its rent or becomes insolvent by entering voluntary liquidation or court liquidation, a landlord has the following remedies:
- To assign the lease.
- Renunciation of the lease.
- To irritate the lease.
- The security of landlords hypothec.
- Issue a decree for unpaid rent and damages.
A landlord may only exercise one of the first three remedies at any time, but may always rely on landlord hypothec as a fall back position. Whilst peaceful re-entry is an extremely common remedy south of the border, it is not a power granted to landlords in Scotland. We detail Scottish landlords’ remedies below.
Assignation of the lease
Assignation of the lease is generally the best outcome for both parties. This allows for an assignment of the lease to a new tenant who will take over the existing obligations under the lease. The assignment must be permitted under the terms of the lease and the landlord will generally need to provide their consent to the process.
If there are rent arrears under the terms of the lease, they may require these to be brought up to date or an undertaking from the new tenant to pay these before they will grant the assignation.
In the context of formal insolvency, assignation is most likely to be used where there is a pre-pack asset sale being arranged. Arranging an assignment of the lease can often assist in improving the value of the business and it is good practice to involve the landlord from an early stage.
In Scotland, landlord’s powers are fairly limited without going to court. This promotes an environment where they can be approached when the company is in financial difficulty.
Renunciation of the lease
Renunciation, also known as surrender of the lease, is where both the landlord and the tenant agree to bring the lease to an end. This is, again, a process which must be done with the consent of both parties.
Renunciation of the lease is most commonly used when the tenant has entered voluntary liquidation or court liquidation. This can also be done in other circumstances, such as if the landlord wishes to sell the property. They then may pay a premium for the tenant to vacate the property early.
If such a premium is offered, this may lend itself to a solvent winding up of the business, through members voluntary liquidation. In turn, allowing the shareholders to claim entrepreneurs relief on capital distributions.
The rules on entrepreneurs relief are broadly the same throughout the UK and more information on this process can be found here.
Irritancy of the lease
If a tenant falls into rent arrears or becomes insolvent, the landlord has the power to irritate the lease, also known as forfeiture. The effect of forfeiture is to bring the lease to an end.
Most commonly this is used in relation to rent arrears. However, the lease will generally dictate a list of circumstances under which the lease may be irritated which could include:
- Failure to make repairs.
- Failure to maintain insurance.
- Subletting without permission.
To irritate the lease, the landlord must first give the tenant 14 days notice of the intention in order to clear the rent arrears or rectify the breach. After this time has passed, the landlord may apply to court for a decree that the lease has been irritated. This will then allow them to take control of the property.
Placing a company into administration will grant a moratorium, preventing the lease from being irritated without further consent of the court. However, it will still be necessary to negotiate with the landlord if a new potential business owner wishes to take over the premises.
Landlord hypothec
In many cases, landlords will be able to rely on the common law remedy of landlord hypothec. This is an automatic right, taking effect at the point the company enters formal insolvency.
There is no need for them to go to court to enforce this. The effect of landlord hypothec is that they are granted security over the company’s moveable assets, for any unpaid rent up to the date of insolvency. The landlord hypothec does not cover any future rentals payable or dilapidations. It only covers physical movable assets on the premises on the date of insolvency.
This security ranks in a similar way to a fixed charge, taking precedence over all other creditors, along with the insolvency practitioners fees. The only costs deductible before payment to the landlord are the costs of realising the assets in question.
The landlord hypothec does not cover assets subject to third party ownership. It also cannot be relied upon where the premises is a residential property, agricultural land or a croft.
Issue a decree
As with all other creditors, if the landlord does not wish to irritate the lease, but simply attempt to collect their rent arrears, they may issue a decree in court. This will allow them to commence the diligence process, instructing the court sheriffs to collect on the debt. More information on the decree and diligence process can be found here.
Next steps
There are various remedies available to landlords of Scottish premises, but the most common issues arising are likely to be them seeking to irritate the lease or instructing court sheriffs to commence diligence over the company assets.
In the first instance, you should always try and negotiate with your landlord, as they are generally critical to your business. However, if or when all else fails, our BusinessRescueExperts can provide advice on the next steps moving forward.