Commercial Tenant Not Paying Rent? Options and Practical Steps for Landlords
We understand that it can be very concerning and frustrating for commercial landlords when their tenants are persistently late in paying rent, or when they don’t pay at all!
But what practical steps can landlords take to recover commercial rent arrears? If you are finding yourself in a position where recovering unpaid rent is necessary, we have summarised the various options below (as well as some practical steps that commercial landlords might want to consider before commencing any formal legal action).
How can commercial landlords recover what they are owed?
When a commercial tenant is not paying rent, the most important thing for commercial landlords to think about is what their intentions are for the property and what they ultimately want to achieve. Key things to consider are:
- Is the tenant persistently late in making payment, or have they historically been good and have fallen on harder times?
- What is the tenant’s financial position? Could legal action push the tenant over the edge into insolvency?
- Will the landlord want the property back to sell or re-let it (and if so, what is the market for doing so)?
- Has the tenant breached any other obligation, and are there service charges as well as rent arrears?
These are just a few considerations, and we appreciate that every commercial landlord’s situation will be different. If you are a commercial landlord and wish to discuss your specific circumstances and options, please get in touch with our expert team of dispute resolution solicitors.
Main Options for Recovering Unpaid Rent
The main options available to landlords to recover commercial rent arrears are:
- Forfeiture
- Commercial Rent Arrears Recovery (CRAR)
- Statutory Demand and Insolvency Proceedings
- County Court Money Claim to recover the debt
- Draw Down a Rent Deposit
- Pursuing a Guarantor or former tenant
Forfeiture
We appreciate that the climate at the moment is a difficult one. When a commercial tenant is not paying rent, it is therefore important for commercial landlords to consider the overall relationship with the tenant as well as the tenant’s conduct and payment history. If the tenant has been persistently late with payment, or hasn’t paid at all or for some time, it is strongly worth considering whether it would be better to re-enter (i.e. forfeit) and determine the lease.
If the property is purely commercial (and does not have a residential/mixed-use aspect), re-entry can usually be carried out without having to go to court. In most situations, we recommend instructing an enforcement agent to peaceably re-enter the property with a locksmith, because this minimises any risks.
When recovering unpaid rent through this method, there is, however, a risk that any steps taken by the landlord that might be considered to treat the lease as continuing might waive the landlord’s right to re-enter and forfeit the lease. Careful consideration needs to be given to the terms of the lease, and if in any doubt, legal advice is essential to avoid this risk. Rent in particular is a “once and for all” breach, and so if a landlord inadvertently waives its right to forfeit, it cannot forfeit again for that breach. Practically, that right may arise again later (depending upon the frequency of rental payments); however, caution needs to be taken to avoid being unable to exercise this right to forfeit.
It is also important to be aware that a tenant, or third party, could apply for relief from forfeiture, but this will only usually be successful if all of the arrears, costs and interest are paid in full. Further, if relief is granted and the tenant breached other obligations, the tenant could be allowed back into occupation, without those other issues having been resolved. This is why it is important to consider all of the risks and options available based on the circumstances and specific terms of the tenancy.
Another important consideration is what obligations will fall to the commercial landlord following re-entry – for example, is there a superior landlord to whom additional obligations will now be owed, or will the commercial landlord now be liable for business rates or other expenses that the tenant had previously been liable to pay?
There is also an obvious risk that, depending on the market, the landlord may be left with an empty property. Careful consideration, therefore, needs to be given to the various options and associated risks.
Commercial Rent Arrears Recovery (CRAR)
For those of us who might be slightly ashamed to admit it, there was once an element of surprise in instructing an enforcement agent to exercise a walking possession order (or distraint) over the tenant’s assets, which was often enough to prompt repayment of the debt owed. Unfortunately, however, the right to do so was abolished, with Commercial Rent Arrears Recovery (CRAR) being brought in on 6 April 2014.
CRAR is often conducted by enforcement agents and can also be used against any undertenants, so it is often a useful option to consider when a commercial tenant is not paying rent.
CRAR is, however, limited to principal rent, so if there are any other arrears (such as service charges or unpaid utilities (even if they’re reserved as “rent”), this can’t be included. It only applies to written “tenancies”, and not licenses, of commercial premises and there must not be any residential aspect to the property (including mixed-use premises).
A flaw following the abolition of distraint is that enforcement agents now have to provide 7 days’ notice before exercising CRAR, which frustratingly gives tenants or undertenants plenty of opportunity to remove any assets (or to abandon the property entirely leaving the landlord with a clean-up operation and goods that they are obligated (as involuntary bailee) to deal with).
Exercising CRAR will also waive any right to forfeit that might have arisen, and for that reason, this method is often not used. As with all of the other options for recovering commercial rent arrears, it is still worth considering in the right circumstances.
Statutory Demand and Insolvency Proceedings
Serving a Statutory Demand is often a really effective tool in obtaining payment when a commercial tenant is not paying rent (and where applicable other sums due under a lease). However, this option should only be used for undisputed debts. Rent alone is generally considered indisputable, however if any other sums are included the tenant might successfully apply to have the Statutory Demand set aside (if the tenant is an individual) or apply to prevent a winding up petition being presented or advertised (if a company tenant) which will result in the landlord incurring significant costs (including having to pay any costs incurred by the tenant).
For debts of over £5,000 (individuals) or £750 (companies), a Statutory Demand can be served on the tenant as a precursor to bankruptcy or winding up proceedings if the debt is not paid within 21 days of it having been served on the tenant. This threat of insolvency action is often threatening enough to prompt full payment, or at the very least an acceptable payment proposal. Statutory Demands must however, be prepared and served properly, and failing to comply with these requirements could result in it being set aside and a wasted costs order being made against the landlord.
The risk with this approach is that if the tenant is insolvent, or close to being insolvent, this might be enough to tip the balance and push it into formal insolvency (which in most cases may result in the landlord not recovering anything, or at least a very small dividend because commercial landlords are often unsecured creditors and other prior ranking creditors will take their slice of the pie first, leaving only a few crumbs for any unsecured or lower ranking creditors).
There are various implications of tenants becoming insolvent (which we will cover in a separate article). However, if you are a commercial landlord and your tenant becomes insolvent, please contact us regarding how this affects you and your options for maximising any recovery.
County Court Money Claim to Recover the Debt
If there is any risk that the debt might be disputed or for debts that include service charges, or other sums due under the lease (other than primary rent arrears), a County Court money claim can be a better option when a commercial tenant is not paying rent.
However, there are significant delays in the courts, and only 6 years of commercial rent arrears can be claimed. Costs can also be quite significant, with no guarantee of recovery (as if a landlord is fortunate enough to obtain a judgment, this will still need to be enforced).
Given all of the circumstances, there are usually better options available, but it is worth considering this in certain circumstances.
Draw Down a Rent Deposit
Commercial landlords may be able to draw down from a rent deposit to recover commercial rent arrears or other sums due under a lease.
However, if there is any doubt regarding whether the tenant is in financial difficulty it might be worth considering all other options before drawing down on the rent deposit, since provided the landlord is in possession or control of the rent deposit the landlord may be able to take money from the rent deposit in the event the tenant is made formally insolvent.
It is also worth noting that if the tenant is solvent and has a good history of payment (but might have a valid reason for delayed payment), it might be worth drawing down from the deposit, provided that the tenant is in a position to top it up again later.
Pursuing any associated Third Parties
In certain (often limited) circumstances, a commercial landlord may be able to seek payment from a guarantor or former tenant. However, the guarantor or former tenant might be entitled to ask the landlord for an overriding lease (which would result in the guarantor or former tenant becoming a direct tenant). It is important, therefore, to consider whether the landlord would want to risk this option (and this will largely depend upon whether any of the other options are available, and the solvency of the tenant).
Practical Steps
Before proceeding with any of the above options for recovering unpaid rent, it is always worth opening up a dialogue with the tenant (particularly if they have been good tenants in the past and are struggling to pay rather than refusing to do so) and trying to negotiate a repayment proposal.
It is also worth checking whether any insurance policies include legal expenses cover – this is a wise investment for any landlord – and it is always worth checking the policy wording as this can cover various types of loss (for example, if the tenant becomes insolvent).
If you are in a position where your commercial tenant is not paying rent and you need to understand your options and the possible risks involved in recovering unpaid rent, you should seek legal advice before moving forward. GA’s expert dispute resolution solicitors in Plymouth are highly experienced in working with commercial landlords to recover commercial rent arrears through the most suitable method, and can talk you through the various methods, as well as the possible costs involved. Please get in touch by calling 01752 203500 or emailing enquiries@GAsolicitors to discuss your situation in more detail.
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