Have problems with defaulting tenants? (Lanice Steward 20 July 2011)

25 Jul 2011

The explanation of legal terms used in property can sometimes be so complicated that only the brightest minds eventually pick up the clear, usually simple, meaning for which they were aiming - and this is often the case when the term hypothec crops up.

A hypothec gives a creditor a non-possessory security interest in a debtor's real property and a preferential right to claims paid out of that property if and when the debtor defaults. The hypothec, unlike a pledge, gives neither possession nor ownership - but does entitle the creditor to a preferential claim on the debtor's goods.
This has particular relevance when a tenant falls behind on his rental payments over a long period. In these cases, the landlord may apply through the court for a hypothec on the tenant's goods. However, such an order does not allow the creditor to act on his own account: the attachment and removal of the goods for subsequent sale have to be done by the Sheriff of the Court.
This will involve the creditor in a quite costly outlay and, as the Sheriff is always much in demand, it could take up to ten weeks to get action. If in the interim, as Smith Tabata Buchanan Boyes have pointed out in a recent newsletter, the tenant removes his goods, the creditor has no claim on them - nor is he entitled to stop the tenant taking his goods away.
One has to realise that defaulting tenants in financial difficulties often have few possessions and these are not valued highly. The cost of getting these attached may be high in relation to what will be recovered when they are sold - so, therefore, although threatening to apply for a hypothec may bring about a payment, executing Sheriff action could quite possibly "not be worth it".
*Lanice Steward is the MD of Anne Porter Knight Frank.