Dealing with rent arrears as a commercial landlord

Rent ArrearsAs a commercial property landlord, rent arrears are one of the business risks that you will face. When a commercial tenant falls behind on the rent, it is often because of cashflow problems that their business has run into. There are several legal avenues a commercial landlord can use to recover the rent, interests and costs depending on the circumstances. Romain Coleman’s commercial landlord solicitors explain these options and how to decide which ones to exercise.

Options for a landlord to recover rent arrears

Once it has been established that your tenant is unwilling or unable to pay the rent, there are several options open to a landlord. Before deciding on the best course of action, here are some factors a landlord should consider:

  • Do you want to recover possession of the property or would you prefer to keep the tenant?
  • Has the tenant been in rent arrears before? Would pursuing a particular remedy drive the tenant into insolvency or bankruptcy, and make it harder to recover any money from them?
  • Is the cost of pursuing a particular remedy justifiable for the amount of rent in arrears?

Payment agreement

If you believe that the tenant’s financial difficulty is temporary, you may enter into a payment agreement with the tenant requiring them to pay the arrears off in instalments. This option allows a landlord to preserve the relationship with the tenant, which can be important in times when the rental market is not in the landlord’s favour.

The payment agreement will need to be drafted carefully, emphasising that the rent arrears should be paid on top of the standard ongoing rent. In the event that the tenant breaches the payment agreement, the landlord reserves the right to forfeit the lease.

Drawing down on a rent deposit

If the lease includes a rent deposit, a commercial landlord can draw down from the deposit to pay the rent arrears where the lease provision allows. The deposit must then be topped up by the tenant within a certain time frame. While this will enable you to recover outstanding rent quickly, this is only a short-term solution and may not be the best course of action if you suspect the tenant is insolvent and will miss the rent payments again in future.

Forfeiture

Forfeiture, also known as “re-entry” involves the landlord entering the property to change the locks when the rent has not been paid for a while, usually from 14 to 21 days. As a commercial landlord, you can do this by a peaceable re-entry while the tenant is absent. The landlord can choose forfeiture of the lease if the tenant is solvent, as it will put sufficient pressure on the tenant to pay up. On the other hand, if the commercial property market is unfavourable, and the tenant does not apply for relief from forfeiture, the landlord may be stuck with a commercial property they cannot re-let easily.

It is best to consult the expert commercial property landlord solicitors at Romain Coleman before taking action, as the rules of forfeiture can be complicated.

Pursuing a guarantor or former tenant

Where a person or company has agreed to act as a guarantor for the tenant under the lease, the landlord can consider pursuing them for any arrears of rent missed by the tenant. Depending on the provisions in the lease and the guarantee given, the landlord may enforce the guarantor’s obligations through court proceedings. If a lease has been reassigned, a landlord with an Authorised Guarantee Agreement may also, in certain circumstances, be able to claim against a former tenant of the premises for the rent in arrears.

Commercial Rent Arrears Recovery (CRAR)

CRAR was introduced in 2014 to replace the old (Distress for Rent) law, and it allows commercial landlords to use an enforcement agent to take a tenant’s goods for sale to recover debt. Various notices will have to be served on the tenant throughout multiple stages of the process. The procedure is complex and certain conditions must be satisfied before using CRAR. You should be aware that invoking CRAR waives your right to forfeiture, and it can only be used to recover rent, and not unpaid bills, service charges or other outstanding payments.

Pursuing a sub-tenant under CRAR

CRAR also allows a commercial landlord to recover rent from a sub-tenant that the tenant has contracted. In order to do so, the landlord has to serve a notice on the sub-tenant, setting out the amount of rent the landlord has the right to recover from the tenant. It also acts as confirmation that the tenant must pay their rent directly to the landlord while the arrears remain until they have been paid, or until the notice is withdrawn or replaced.

Serve a statutory demand

If your tenant is a company and owes over £750, you can make a written demand for payment which has to comply with certain statutory requirements. The tenant then has three weeks to pay before you can petition to wind up the company. Much like using CRAR, just the threat of their business being dissolved can be enough to prompt a tenant to pay. If your tenant is an individual or sole trader who owes more than £5,000 the same process applies, but you would issue a petition for bankruptcy instead.

Issue court proceedings

A landlord can issue court proceedings to recover the rent owed by the tenant. While the mere threat of legal action alone can sometimes motivate the tenant to pay up, court proceedings are usually a last resort compared to other remedies because they are time-consuming and expensive.

Call Romain Coleman if you face rent arrears

If your tenant is late paying rent, the first thing you should do is to open a line of communication to establish the situation. The problem may be temporary and can be easily resolved. However, if the tenant is unresponsive or unwilling to pay, your next course of action should be to cease communications and immediately contact your landlord solicitor.

Romain Coleman exclusively represents landlords – so you know we will always be on your side.

If you are a landlord having problems with rent arrears, call us today on 0208 520 4555 and see how we can help. You can also use our Quick Online Enquiry Form.

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This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.

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