Recovering Commercial Rent Arrears
If a tenant doesn’t pay their rent, a landlord has various options. In this article, which is the third in a series on commercial rent arrears, we take a closer look at what those options are, along with some of the pros and cons of each.
Failure to pay rent
If a tenant fails to pay rent it is normally in one of the two following situations:
- They have requested a rent concession. You can find out more information about a request for a rent concession and when it may be an appropriate option here: Understanding a Request for a Rent Concession
- They have simply failed to pay their rent or the landlord has refused a request for a rent concession. In this situation, the landlord is left with the following options:
Issue a statutory demand
A statutory demand for late rent can be issued when the outstanding debt reaches either £750 for a tenant company or £5,000 or more for individuals.
A statutory demand requires payment within 21 days, and failing payment, the landlord can issue legal proceedings either for a winding-up petition for a company or bankruptcy proceedings for an individual.
Pros and cons
This is quite a draconian approach but can also be a quick and cost-effective tactic, motivating a tenant into payment to avoid proceedings. However, if the tenant doesn’t pay, due consideration needs to be given to whether it will be in the landlord’s interest to issue proceedings, and whether, in the event, there are other higher ranking creditors who will be paid before the landlord.
Issue proceedings for a money judgment
The landlord could issue court proceedings asking for a money judgment for the arrears. There is a strict procedure to be followed when issuing this type of claim, including allowing a certain amount of time for payment before issue and serving a letter before action on the tenant.
If the landlord issues proceedings, the parties will usually be invited to engage in alternative dispute resolution such as mediation with a view to trying to agree an outcome and settlement. If the parties fail to reach agreement, the matter will have to be resolved by way of a court hearing in due course.
Pros and cons
Again, this is a draconian approach but can sometimes result in a speedy resolution if the parties are able to reach an agreement by way of mediation. However, if the parties can’t reach an agreement, the legal proceedings can be slow and potentially costly.
If the tenant doesn’t defend or respond to the claim, the landlord may be able to speed the process up by applying for a default judgment. However, in the event the landlord does obtain a money judgment order, if the tenant still doesn’t pay, the landlord will then have to apply to enforce the order. Apart from the additional time and costs involved, the success of such an application will depend on whether the tenant has assets of any value.
Commercial Rent Arrears Recovery (CRAR)
CRAR is a procedure that allows landlords of commercial premises to recover rent arrears by seizing and selling the tenant’s goods without needing to go to court. There are strict rules which must be met before a landlord can take advantage of this method.
A landlord must give 7 days’ notice of enforcement via the CRAR procedure. Thereafter, the landlord must instruct Certificated Enforcement Agents and complete a Warrant of Control form. The enforcement agent then takes over the process and can enter the property (through an open or unlocked door) in order to seize goods. There is a similar procedure in respect of sub tenants.
It’s important to bear in mind that the landlord does not have the right to seize the tenant’s goods which will be sold at auction in due course. Generally the tenant must still be in occupation of the premises and there must also be a lease in writing. A contractual licence to occupy is not enough.
Pros and cons
This again is a draconian approach but can be swift and effective. That said, if the tenant is asset poor it is unlikely to be a suitable solution. Goods belonging to third parties cannot be seized and nor can items that the tenant personally needs to carry out its business or trade up to an aggregate value of £1,350. What’s more, only principal rent (including VAT and interest) can be recovered not service charges or insurance rent.
Forfeiture of the lease
Forfeiture is the process by which a landlord can terminate the lease as a result of some default by the tenant. The forfeiture is normally done by a Certificated Enforcement Agent who enters the property peaceably and takes vacant possession of the property. Alternatively, the landlord can issue court proceedings claiming possession.
However, in order to able to forfeit the lease, there must be an express term in the lease to that effect. Most commercial leases will have a forfeiture clause permitting the landlord to forfeit the lease when the tenant fails to pay the rent within a specified period (normally 14 or 21 days of the rent falling due). Care must be taken by the landlord not to inadvertently waive their right to forfeit which may occur if they demand following the expiry of the period given for payment.
Pros and cons
This approach can be effective if you cannot take advantage of CRAR (above) because the Certificated Enforcement Agent can’t gain entry to the property or if the goods to seize have little or no value.
However, once the lease is forfeited, the tenant is released from future liability and the landlord becomes responsible for business rates. This can be a problem if the landlord faces a period of vacancy as a result but might be advantageous if the landlord wishes to redevelop the property.
Rent deposit and bank guarantees
A landlord may be able to deduct unpaid rent from a tenant’s deposit or from a guarantor.
The rent deposit deed within the lease agreement will usually set out the conditions under which the landlord can draw down on the deposit for rent arrears. The landlord must give the tenant notice that they intend to do this and the tenant will normally be required to top up the deposit accordingly in due course. Taking money from the deposit to cover arrears may potentially waive the landlord’s right to forfeit the lease in respect of those arrears.
Similarly the terms of a guarantee are likely to set out the precise circumstances in which the landlord can pursue the guarantor for the arrears.
Pros and cons
Provided the deposit deed and terms of the guarantee permit this approach, it can be quick and cost effective, and the landlord can pursue both a tenant and a guarantor at the same time.
Pursuing sub tenants
If there is a sub tenancy, the landlord can require the sub-tenants to pay the rent until the tenant’s rent arrears are paid. However, the arrears must be at least seven days’ net rent and the landlord must serve notice on the sub-tenants.
Pros and cons
Whether seeking the recovery of arrears from a third party is an appropriate or effective approach is likely to depend on the circumstances of the individual case.
Insurance
Many landlords will have insurance in place to cover a non-payment of rent situation. However, of course, it will be important to consider the full implications of claiming on that insurance.
Unfortunately, commercial arrears are likely to be an increasingly common problem in the current economic climate. Before deciding on the correct approach, it is essential that a landlord considers the implications, pros and cons of all options. There is a balance to be had between ensuring payment of the arrears and supporting a tenant through difficult times.
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