A Guide to Commercial Rent Arrears
In an uncertain economic climate and with more and more businesses struggling, commercial rent arrears are an increasingly common problem for landlords and tenants. From a tenant’s perspective, they may be struggling with cash flow, business operations and the overall financial health of the business. From a landlord’s perspective, the challenge is how to support the tenant as much as possible, whilst ensuring the “best outcome” for the landlord.
What that “best outcome” is will vary from case to case but could be payment of the rent, agreeing a rent holiday for a short period or forfeiting the lease and re-taking possession of the property. Starting with a general overview, in the following series of articles, we’re going to take a closer look at what options are available to a landlord, and the pros and cons of the different approaches.
The tenant fails to pay rent
The tenant’s failure to pay rent is likely to take one of two forms. Either they simply fail to pay, or alternatively, they may request a rent concession. Of course, there could be any number of reasons for the failure to pay the rent from unforeseen circumstances surrounding the business operations, a changing market / industry, economic recession, a global pandemic or simply poor financial planning and management.
Good communication at this stage between the landlord and tenant is important to help inform the best response. The landlord will need to consider how many payments the tenant has missed, whether this is the first missed payment and whether the tenant has breached any other terms of their lease. The landlord will also want to know how financially secure the tenant is and, of course, whether there are any guarantors or other connected parties that could settle the outstanding rent?
The landlord will also need to consider whether it’s in their interest to maintain the tenancy or repossess the property and find a new tenant.
Helping a tenant during a difficult financial period may have advantages and be cheaper and more cost effective in the long term than forfeiting the lease and obtaining possession of the property.
Rent concession request
A rent concession is a temporary agreement between a landlord and tenant to reduce or suspend rent payments. They were a notable feature of the Covid landscape. The request will normally come in the form of a formal written request. It may be a request for either a reduced rent for a period, a temporary suspension of rent payments or changes to the payment schedule. Rent concessions are also often used in the slightly different context of attracting new tenants as an incentive.
On receipt of a request, the landlord and tenant should start negotiating. The landlord will undoubtedly need to know more about the financial situation of the tenant and the reason for the request. Thereafter, the parties can either reach a rent concession agreement, or the landlord can decline the request and consider other methods of recovering the rent.
You can find more detail about rent concessions, including their pros and cons here: Rent Concessions.
Tenant simply fails to pay rent or the landlord has refused a rent concession request
In this situation, the landlord has a number of options:
- Issue a statutory demand for the payment of rent arrears within 21 days, subject to the amount of arrears.
- Issue court proceedings to recover the rent arrears. This route does offer the parties the opportunity to engage in an alternative dispute resolution such as mediation. If this fails, the matter will have to proceed to court proceedings.
- Give notice of an intention to take control of and sell a tenant’s goods to the value of the rent arrears (pursuant to the Commercial Rent Arrears Recovery (CRAR) procedure.
- Forfeiture of the lease. Most leases contain a right for the landlord to forfeit the lease when the tenant fails to pay the rent within a specified period.
- Seek to recover the rent from other parties such as guarantors, sub tenants or an insurance company.
- Withdraw the equivalent of the arrears from a rent deposit.
Which of the above options is appropriate will require an understanding of the reason for the rent arrears, the tenant’s financial situation and the landlord’s overall objectives for the property. There are also inevitably cost and time implications to consider and as you would expect. There are also pros and cons to each of the above as well as procedures and rules that must be complied with. Therefore it is important to take comprehensive advice at this stage.
You can find more information about all the above options here: Recovering Commercial Rent Arrears
Tenant assistance and business restructuring
From the tenant’s perspective, it may be worth exploring other routes for assistance such as equity funding, a loan or grant if available. If the rent arrears are more than just a financial blip and the business is in financial distress, the tenant may need to consider restructuring the business as a means of rescuing it.
Preventative and security measures
It perhaps should go without saying, that in order to minimise the risk of rent arrears, landlords should always conduct thorough credit checks and request references from prospective tenants to assess their financial stability and reliability.
Lease agreements should also be professionally drafted setting out in clear terms the amount of rent due, payment due dates, penalties for late payments and procedures for addressing rent arrears. Landlords should also consider having rent guarantee insurance, which provides coverage for unpaid rent in the event a tenant defaults.
For more information about commercial leases, visit:
If you would like to discuss the above, please call 020 3988 0170 or contact us via our website.
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