One of the most important issues faced as a landlord is ensuring that your commercial tenant pays its rent on time. Where your tenant fails to pay the rent and other sums due under a lease, there are several remedies at your disposal which are designed to rectify the breach and recover payment but it will be for you to decide the best course of action having regard to the individual circumstances, current market conditions and any future plans you may have for the property. Depending on your long term objectives, you will need to consider what appropriate action to take and how to protect your position in the event of a tenant defaulting on the rent payments.
However, it is important that you first consider the following points which may assist in helping you deciding what action is appropriate:-
- Has the tenant breached any other provisions in the lease in addition to not paying the rent?
- Has the tenant failed to pay the rent on more than occasion or is this an isolated incident?
- Does the tenant have a strong trading history and are they solvent? Would pursuing a particular remedy create a possibility of the tenant becoming insolvent or bankrupt and therefore make recovery of any money due from them more difficult?
- Do you want to recover possession of the property (perhaps for development) or would you prefer to keep the tenant?
- Does the cost of pursuing a particular remedy make it worthwhile when considering the level of rent arrears?
- Are there any guarantors or third parties under the lease who would be required to settle any arrears on behalf of the tenant?
Once you have been able to consider the above you should then decide which course of action you wish to take. Our specialist Commercial Property Legal Advisers would be able to help you reach that decision, but the following gives you an overview of the general remedies which may be available to you:-
Forfeiture
Most commercial leases provide a right for the landlord to re-enter the property, change the locks and terminate the lease where a tenant breaches any of the covenants (including non payment of rent). This remedy is known as “forfeiture”.
Where you have a tenant with a poor record of rent payments, or if the current market conditions are strong, you may wish to proceed straight to forfeiture – particularly if you believe that you can easily re-let the property to another tenant on similar (or better terms) or command a higher rent. Similarly, if you would prefer to regain possession of the property because you wish to develop it then forfeiture may be an attractive remedy. However, if market conditions are weaker or the property will likely be sat vacant for some considerable time, you may wish to keep the tenant and pursue an alterative remedy to ensure the tenant performs its covenants in the future, especially if you do not have an appetite to pick up a rates bill for that period when the property is vacant (assuming any rate reliefs have already been exhausted).
If you decide to embark on the road of forfeiture you must bear in mind that the tenant can apply to the Court for relief from forfeiture within six months of the date the lease is forfeit. Before deciding whether to grant relief from forfeiture, the Court would want to see that any rent arrears have been settled. Assuming those arrears have been settled, the Court may award the tenant relief allowing them to retake occupation or they could award the tenant damages. Forfeiture is not therefore without its risks, particularly if you have already relet the property to a new tenant.
Should you decide to forfeit the lease you will also need to consider how to recover the debt if the tenant does not apply for relief. One of the other remedies below can be followed but some may not be available in view of the fact that the lease has been effectively terminated. Care must also be taken to ensure that you do not, perhaps unwittingly, waive your right to forfeiture. For example, if you have knowledge that the tenant has breached the lease (and you almost certainly will do if it has failed to pay the rent) and you perform an unequivocal act which recognises the lease as continuing to exist which you then communicate to the tenant, you risk losing the ability to forfeit the lease (although in certain circumstances that may only be temporarily). Such situations may arise where you accept payment or part-payment of the rent and allow the tenant to continue to occupy under that arrangement. If the tenant fails to pay the rent, often the best approach is to cease communication and seek legal advice as soon as possible on the matter.
Draw down on rent deposit
If you secured a rent deposit from the tenant then you may be able to draw down this to cover the extent of any arrears owing. Not all rent deposits are the same, so you will need to review the terms of the Rent Deposit Deed to determine if there are any limitations in withdrawing from the tenant’s deposit first.
You should also consider the general solvency of the tenant and whether or not there are more appropriate methods of recovering the arrears. For example, if the tenant regularly fails to pay the rent then other courses of action may be more appropriate. However, if it is an isolated incident, then drawing down the rent deposit can be a quick way to recover any losses. If you decide to draw down the rent deposit then the Rent Deposit Deed will usually require the tenant to top-up the deposit back to a minimum amount within a certain number of days.
Please note that if you decide to draw down the rent deposit then you will effectively waive any right to forfeit the lease, for the time being at least.
Pursuing a guarantor or former tenant
If there is a guarantor under the lease then there will likely be a provision that obliges the guarantor to pay any sums due from the tenant in the event that they fail to pay. If the lease has been assigned then there may be a clause in the lease requiring a former tenant to guarantee the obligations of the current tenant, which includes settling any arrears. Again, you will need to review the obligations in the lease carefully to see if there are any limitations imposed in this regard and you should seek legal advice on the matter.
Go to court
You can take the tenant to court to recover rent and other sums due under the lease but this is often the last resort. Court hearings may not be set for several months and there is a risk that the tenant will continue to default on payment. If payment is required immediately then you can look to serve a statutory demand requiring payment within 21 days. However, if you would rather preserve the landlord and tenant relationship then issuing court proceedings may be the most appropriate method as the delays will often give the tenant time to sort out its financial affairs yet provide the necessary shot in the arm with the threat of court action hanging over them.
Statutory demand and insolvency
Where there is no dispute as to the amount of arrears (non payment of the annual rent being the most obvious example) you can look to serve a statutory demand on the tenant. If the tenant fails to settle those arrears within 21 days then this may be used as evidence of the tenant’s inability to settle those arrears, potentially giving grounds to present a bankruptcy or winding up petition. Please note that there are certain limitations to this and the level of debt will need to be assessed before this course of action can be embarked upon. Sometimes the mere threat of insolvency can be effective enough to produce the desired outcome but it is essential that there are no disputes as to the amount of debt as you could end up being liable for significant costs.
Commercial Rent Arrears Recovery (CRAR)
CRAR is a unique method in recovering rent arrears relating to commercial property only (it does not cover residential or mixed use properties). What happens is that you would instruct an enforcement agent who would take control of a tenant's goods and sell them on in order to recover the debt. The procedure is complex and various notices need to be served on the tenant throughout various stages of the process. Certain conditions also need to be satisfied before utilising CRAR. Please note that CRAR only applies to the recovery of arrears for principal rent. It cannot therefore be used to recover arrears in relation to service charges, insurance rent or other sums due under the lease.
If there is a subtenant in the property then you also have the right to pursue the subtenant to pay the tenant’s rent that is otherwise directly owed to you. Again, notices will need to be served and legal advice should be sought.
Payment agreement
You may decide to enter into a payment agreement with the tenant requiring them to pay the arrears off in installments. Any payment agreement will need to be drafted carefully and there must be no confusion that the rent should continue to be paid as normal, in addition to the rent arrears. Other provisions will also need to be considered such as preserving the right to forfeit the lease in the event that the tenant breaches the payment agreement.
The benefit of a payment agreement is that it helps to preserve the landlord and tenant relationship and provides some time for the tenant to get their financial affairs in order. If you suspect that the tenant will not be able to keep to the agreement, or you have concerns over the tenant’s general solvency then this may not be the best course of action to take.
Final thoughts
There are a number of remedies available at a landlord’s disposal in which to recover rent arrears under a lease but which course of action is best for you will depend on your individual circumstances.
If you are a landlord and your commercial tenant has failed to pay its rent, why not speak with one of our specialist Commercial Property Legal Advisers to assist you further.