Commercial Rent Arrears

Most commercial landlords will at some time have to deal with rent arrears. How you approach this situation will depend upon a number of factors.

Forfeiture

Forfeiture, which is often referred to as “re-entry”, is the right of a landlord to bring a lease to an end if a tenant has breached any of the covenants contained in the lease, including non-payment of rent.

Most commercial leases provide for a right of re-entry if certain provisions are satisfied. If nobody is in occupation of the premises, peaceable re-entry for rent arrears is possible. In this situation the landlord will re-enter and change the locks. In practice, most will employ the services of a certified bailiff who will attend with a locksmith. The bailiff will attach notices to the premises to inform that tenant that the lease has been brought to an end.

It is important to remember that forfeiture ends the lease, so the tenant will no longer be liable for future payments of rent.  A landlord will therefore need to consider whether, commercially, forfeiture is the best remedy for them.

“I am thrilled to inform you Mike that the money was received by the deadline. May I convey my very many thanks for everything you have all done to bring this unfortunate situation to a close.” AS, February 2018

Commercial Rent Arrears Recovery (CRAR)

A change in the law in 2014 introduced Commercial Rent Arrears Recovery (CRAR) which, if certain criteria are satisfied, allows a landlord to recover overdue rent without the need for a court order. Instead, a landlord can instruct an enforcement agent to take control of a tenant’s goods and sell them at a public auction in order to recover the value of the outstanding rent.

Whilst the threat of removal of items essential to a tenant’s business may be a significant incentive for the tenant to pay the rent arrears, the risk is that the required period of advance notice provides a tenant with an opportunity to remove valuable goods from the premises.

Another consideration for landlords is that by using the CRAR procedure the landlord waives the right to forfeit the lease.

Drawing down on a rent deposit

At the start of the lease, a rent deposit deed may have been entered into with a tenant . If so, an option for a landlord is to draw down the arrears of rent from the deposit paid by the tenant. The landlord must provide notice of their intention to do this and the tenant will be required to replenish the funds in the rent deposit account.

In practice, this option may only provide a short term solution, as if the tenant is in financial difficulties it will probably fail to replenish the funds in the rent deposit account.

Pursuing a sub-tenant directly

If a tenant has sub-let the premises, a landlord is entitled to serve a notice on the sub-tenant requiring them to pay the rent it owes directly to the landlord, rather than the tenant. The notice to the sub-tenant must set out the amount of rent the landlord is entitled to recover from the tenant and confirm that the sub-tenant must pay its rent direct to the landlord until the tenant’s arrears of rent have been paid.

“Thank you again…your guidance and advice has been superb and I think we did a good fight! I will have no hesitation whatsoever, in recommending you to anyone I know who would need your services.” DL, February 2019

Pursuing a tenant’s guarantor or previous tenant

Sometimes a third party will have agreed to act as a guarantor for the tenant, either at the start of the lease or on an assignment. If the tenant breaches its covenants under the lease, including arrears of rent, the landlord has the right to pursue the guarantor. This would involve the landlord issuing court proceedings to enforce those obligations.

Serving a statutory demand

A landlord can always serve a statutory demand on a tenant. If the tenant is a company, the amount owed must be more than £750, or more than £5,000 if the tenant is an individual. The tenant then has three weeks to make payment, failing which the landlord can issue a winding up petition in respect of the tenant’s business or for personal bankruptcy.

Issuing court proceedings

This option would be suitable if there is a dispute over the sums owed, which is rare in the case of rent arrears.

Considerations

In deciding the most appropriate method of recovering commercial rent arrears, there will inevitably be a host of considerations – legal, practical and commercial. The risk of using an inappropriate method of recovery and/or failing to comply fully with the required procedure, means that it is always advisable for a landlord to seek legal advice before taking any action.