This article examines some of the key legal remedies available to a Landlord where a Tenant is in default under a commercial lease in Bahrain. The remedies available to a Landlord include so called ‘self-help’ remedies as well as those requiring the commencement of court proceedings. It should be noted that some of the remedies set out in this article are not mutually exclusive and can be used in conjunction with other remedies.
What is Tenant Default?
Tenant default occurs when a Tenant breaches one of the tenant’s covenants in its lease. Tenant default can arise in a number of different ways but will typically be for one of the following:
Non-payment of rent or other sums reserved under the lease
Breach of the repair covenant
Breach of the alienation covenant
Breach of the permitted use
An act of Insolvency
Tenant default may or may not be obvious. For example, non-payment of rent is likely to be easily noticed whereas a minor breach of the repair covenant may be less obvious. However, a Landlord should be properly managing its investment and undertaking regular inspections so that any tenant default can be identified and dealt with.
Attitude and Aims
Once a Landlord is aware of the tenant default, it will need to consider what action to take. Such action will be influenced by the Landlord’s attitude to the tenant default as well as the Landlord’s aims.
For example, a Landlord will need to assess whether the tenant default is a temporary issue or whether it is more serious. A Landlord will also need to consider whether it wishes to preserve its rental income and what the prevailing market conditions are like. Ultimately, any action taken by a Landlord will be driven by whether it wants to:
Allow the lease to continue, for the Tenant to remain in occupation and for the Tenant to continue paying rent; or
Terminate the lease and obtain vacant possession.
Self help remedies are those which a Landlord can employ without the need to commence legal proceedings and a number of which are set out below.
Entering the premises and undertaking works that should have been done by the Tenant
It is not uncommon in commercial leases in Bahrain to see a right reserved in favour of the Landlord allowing it to enter the premises, remedy any breaches of covenant and to recover the cost of doing so from the Tenant.
However, such a self help remedy is not available to a Landlord in Bahrain. A Landlord must obtain a Court order to enter the premises and carry out any necessary work.
This remedy allows a Landlord to enter the premises, seize the goods of the Tenant which are contained within the premises and to sell them so as to use the proceeds of sale to set-off any sums owed to the Landlord.
Again, such a self help remedy is not available to a Landlord in Bahrain. A Landlord must obtain a Court order in Bahrain prior to proceeding with this remedy in accordance with the Civil and Commercial Procedures Law of 1971.
Rent Deposit / Security
A Landlord may seek to utilise any monies from a rent deposit / security which it holds against any tenant default such as non-payment of rent.
Article 353 of the Civil Code (2001) provides a Landlord with the right to set-off monies held in a rent deposit / security against rent, service charges or other monies owed to it.
Where a Landlord has the benefit of a guarantee, it may seek to oblige the Guarantor to remedy any tenant default. A guarantee must be in writing to be enforceable under Bahrain law and must be carefully drafted. For example, the guarantee should specify that the Guarantor is the primary obligor and that the guarantee being given is irrevocable.
Demand from third party
Article 544 of the Civil Code (2001) provides for the ability for a Landlord to obtain rent directly from a Sub-Tenant subject to requisite notice being given.
Under Bahrain law, a Landlord is unable to seek redress from a former Tenant. If a Tenant has assigned its interest to an Assignee, and subject to the Landlord consenting to such an assignment, Article 545 of the Civil Code (2001) provides that the Tenant will not be liable for any tenant default which is caused by the Assignee.
Those remedies which require the commencement of court proceedings in Bahrain relate to the following:
Suing for Damages
A Landlord may wish to sue the Tenant for damages arising from the tenant default. For example, a Tenant may have breached its repair obligations and has either caused damage to the premises or has allowed the premises to fall into disrepair.
Suing for Recovery of Arrears
A Landlord may wish to seek recovery of a debt from the Tenant against its failure to pay rent or other sums reserved under the lease.
This remedy allows a Landlord to prevent the Tenant from breaching an obligation under the lease such as the user covenant. For example, a Landlord may wish to prevent the Tenant from changing the nature of the goods being sold at the premises.
Issuing Insolvency Proceedings
Where a Tenant is in arrears of rent or other sums reserved under the lease, in addition to seeking the recovery of such sums, the Landlord may seek to issue insolvency proceedings against the Tenant on the basis that it is unable to meet its obligations as they fall due. The threat of such action is often used by a Landlord as additional leverage.
A Landlord may seek a Court order requiring the Tenant to comply with the covenants contained in its lease. This may be appropriate where a Landlord wishes to ensure that the Tenant trades from its premises during certain hours. This is particularly relevant where the lease contains a turnover rent clause as the Landlord has a vested financial interest to ensure that the Tenant maximises it turnover generated from the premises.
Finally, the Landlord may wish to terminate the lease due to the tenant default. The termination clause in the lease needs to be carefully drafted. For example, the period of notice which a Landlord should give to the Tenant is important. In Bahrain, best practice is for the notice period in relation to termination for tenant default to usually follow the notice period set out in Article 7(a) of Publication No. (42/1374) Law for Leases of Commercial Shops in Manama (1955), which relates to non-payment of rent but is applied more generally and provides for a 1 month grace period and a 2 week notice to remedy.
It is also important to note that under Bahrain law, whilst a lease may provide a Landlord with a contractual right to terminate upon tenant default, should the Tenant fail to vacate the premises (which will usually be evidenced by the Tenant handing back the keys and surrendering the premises), the Landlord will require a Court order to obtain eviction and possession of the premises.
In addition, where the Tenant has vacated the premises but has not removed all of its property, the Landlord is not free to lawfully dispose of such property and again, the Landlord will require an appropriate Court order.
The termination clause should also refer to the Court of Urgent Matters as being the appropriate Court in relation to obtaining the required order for eviction. This is mainly due to expediency. However, the Court of Urgent Matters will only be able to grant an order for eviction if it is satisfied that it is the intention of the parties that the lease has automatically terminated following the tenant default and failure by the Tenant to comply with the relevant notice period. Any doubt as to whether the lease is still in existence may mean that the Court of Urgent Matters is unable to deal with the matter.
A Landlord should be wary that certain actions by it which recognise the continuation of the lease after it becomes aware of the tenant default may result in the Landlord ‘waiving’ the breach and therefore potentially losing its right to terminate. For example, accepting rent after the tenant default has arisen may constitute waiver.
Once an order for eviction has been obtained from the Court of Urgent Matters, a Landlord will need to enforce the order at the Court of Execution. The process of obtaining an order for eviction and enforcing the same is beyond the scope of this article. However, the period from the tenant default to obtaining physical possession of the premises can easily exceed 12 months and recovering any arrears and/or damages may take even longer.
Whilst a Landlord has a number of remedies available under Bahrain law should the Tenant breach the terms of its lease, the most appropriate remedy will depend on the Landlord’s aims, objectives and commercial requirements. It is also critical to note that should a Landlord wish to evict the Tenant and obtain possession, it can only do so by obtaining a Court order.
Charles Russell LLP has considerable expertise and experience in relation to advising on commercial leases in Bahrain and across the region for both Landlords and Tenants. In particular, and in conjunction with our preferred local counsel, we have advised a number of clients in relation to obtaining vacant possession following tenant default.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.