What are your options as a commercial landlord when your tenant falls into rent arrears?

When tenants fail to pay rent on time, commercial landlords are faced with a difficult question: What now?

This guide will outline the main options available to commercial landlords, along with their pros and cons for pursuing each option.

• Considerations
• Do Nothing
• Offer Repayment Plan
• Rent Deposit Drawdown
• Commercial Rent Arrears Recovery (CRAR)
• Forfeiture
• Guarantor or Former Tenant
• Statutory Demand & Insolvency
• Court proceedings

Considerations

Before we dive into the options, there are a couple of points we would like to raise:
First, there is no statutory grace period for late rent, unless it has been specifically outlined in the tenancy agreement. To minimise the impact of late rent for a commercial landlord, we recommend starting a process for dealing with rent arrears as soon as possible.  

What is the first thing you should do if a commercial tenant is late on their payment?

Talk to the tenant

There are other reasons aside from experiencing financial hardship why the tenant hasn’t paid rent on time. Starting a simple conversation with the tenant and discussing the reason for the late payment can dictate your next steps. Even if it’s not the first instance of late payment, communication with the tenant should always be considered.

Here are some considerations a commercial landlord should use when choosing an appropriate course of action:

– What’s the reason for the late payment? Cashflow, Withholding rent over a dispute, change of bank account, etc.

– Is it their first late payment, or have they been regularly defaulting?

– Have they been a good and reliable tenant, maintaining the property well?

– What’s the current market like? Would it be easy to find a new tenant?

– Do you have protections in place, such as a personal guarantee, rent deposit, insurance, or other securities?

So, what actions can you take against a commercial tenant who Is late on payment?

Do nothing (For Now)

This is not a long-term option in any way. It is only beneficial if you have a strong, long-standing relationship with the tenant and they keep the property well-maintained. In that scenario, it may be ok to take a more relaxed approach. However, it’s still best to find out as soon as possible why the payment hasn’t arrived, so you have a good idea of what to do next. Hopefully, letting them know they are late on their payment will be enough to prompt them to pay.

If the situation doesn’t get resolved quickly, then be prompt to utilise the other options below. 

Pros of doing nothing:

• Preserves the relationship with the tenant.
• Avoids legal costs.

Cons of doing nothing:

• Delayed recovery of rent.
• Chance of recovering no rent.
• Risk of the rent arrears increasing.

Offering a repayment plan

If you want to maintain a relationship with your tenant and you believe they will be able to recover from their financial situation, it may be worth offering them a repayment plan. There are many ways a payment agreement can be made, with the simplest options being to have the debt recovered through small instalments or to offer a temporary period of rent concession.

Pros of a repayment plan:

• Preserves the tenant relationship and occupancy.
• Opportunity to recover some of the rent (Ask the tenant to pay what they can now and agree on a repayment plan for the remaining balance).
• Flexibility for both Landlord and Tenant.
• Can be quicker than some other actions.
• Can avoid or reduce legal costs.

Cons of a repayment plan:

• Limits your ability to pursue other actions while the repayment plan is ongoing.    
• Risk of further rent defaults.
• The plan can prolong the issue without addressing the underlying problems.

Rent Deposit Drawdown

If the landlord has the right to draw down on the deposit, then this may be a good option to cover the rent quickly. The rent deposit deed will outline ways you can utilise a deposit drawdown, and rent arrears can be a valid reason.

Using the deposit to recover rent can be useful if you believe the tenant is going to go into administration. The landlord should take the deposit before the tenant goes into administration. Because once a tenant goes into administration, things change, and moratoriums can be imposed.   

Pros of drawing down on the rent deposit:

• Immediate cash recovery.
• No external enforcement is required.
• Some rent deposit deeds will require the tenant to top up the deposit after a withdrawal.

Cons of drawing down on the rent deposit:

• Limited to the amount of the deposit. 
• If the deposit is structured as a charge (like a secured loan), you don’t lose your rights to it even if the tenant enters administration. So there’s no need to panic-draw from it right away.
• In some cases, courts may allow you to claim the funds at a later date.
• You may need the deposit to cover other costs such as property damage, lease-end dilapidations or legal fees.

Commercial Rent Arrears Recovery (CRAR)

CRAR is a legal method that enables commercial landlords to recover unpaid rent without the need for court proceedings. The landlord can inform an enforcement agency to collect rent or seize goods to recoup the debt.     

There are some rules and requirements to when you can action a CRAR:   

– A valid lease agreement between the tenant and the landlord exists

– The rent arrears are seven days outstanding

– A notice must be provided 7 days before any enforcement is taken or goods are seized. (The court may grant a reduced notice period if it believes it is likely the tenant will move the goods out of the property.)

– The amount recoverable is only for rent. Service charges, insurance, etc, cannot be included.

– The value of the goods taken must not exceed the amount of rent that is owed.

– The agent must recover the goods within 12 months of the enforcement notice

– Only goods stated in the commercial lease that are owned by the tenant and on the property can be taken. They must also be taken during working hours.  

– Only certified enforcement agents can perform a CRAR and are authorised under the Tribunals, Courts and Enforcement Act of 2007

– After finding an authorised enforcement agency, you will need to complete a Warrant of Control form

Pros of Commercial Rent Arrears Recovery (CRAR):

• Cheaper and quicker than going to court.
• The notice or threat of a CRAR can be enough of an incentive for the tenant to pay.
• Reassurance from having accredited professionals to conduct the action in a way that is compliant with the law.

Cons of Commercial Rent Arrears Recovery (CRAR):

• Limited to only rent. You cannot use CRAR for recovering service charges, etc.    
• If the deposit is structured as a charge (like a secured loan), you don’t lose your rights to it even if the tenant enters administration. So there’s no need to panic-draw from it right away.
• In some cases, courts may allow you to claim the funds at a later date.
• You may need the deposit to cover other costs such as property damage, lease end dilapidations or legal fees.

Forfeiture: Take Back the Property

Commercial landlords can use forfeiture to reclaim their property and terminate the lease with the tenant. Forfeiture is a legal process used by the landlord to re-enter the property after the tenant has breached the lease terms.    

There are a few scenarios where forfeiture can be effective. One being if the tenant has caused damage to the property or broken other lease terms.  Another scenario to consider forfeiture is if the tenant has become unresponsive or you believe they show no evidence of recovering financially. You could cut your losses early in order to prepare for a new tenant.    

Forfeiture should be used with caution, as there are also situations when it can backfire, particularly if the tenant has a successful relief appeal.

Pros of forfeiture:

• End the lease quickly
• Get access to the property quickly.
• Can make property available for a new tenant at a higher rent if the market is strong.
• The threat of forfeiture is a strong incentive for the tenant to pay the rent.

Cons of forfeiture:

• The property will become vacant, but you will still be liable for business rates.
• You cannot accept any form of rent as this will risk waiving your right to forfeit.
• Tenants can apply for relief from forfeiture and reclaim the lease by settling arrears. If you re-let the property and the tenant is granted relief, you could risk legal action.

Guarantor or Former Tenant

Some leases can include a personal or corporate guarantor as a form of protection in case the tenant defaults on payments. An example of a corporate guarantor could be when a franchise opens a new location and the tenant uses the chain as a guarantor on the lease. You should always vet the guarantor. If the guarantor is a shell company, it could be very hard to pursue any rent recovery.

There is also the opportunity to pursue the former tenant. This route can be available if the current tenant and the former tenant signed an AGA (Authorised Guarantee Agreement)

Pros of pursuing a Guarantor or Former Tenant:

• May be able to recover the full amount
• Useful if the tenant has become insolvent

Cons of pursuing a Guarantor or Former Tenant:

• May require the court to be enforced.
• Success can be dependent on the wording of the lease.
• The guarantor or former tenant must also have the funds to cover the debt.

Statutory Demand & Insolvency

A statutory demand is a legal notice requiring payment of outstanding debt within 21 days. If the tenant fails to pay within the notice period, the landlord can start a petition for the business to wind up or present as bankrupt. A Statutory Demand is useful if there is no dispute regarding the debt.  

Pros of statutory demand:

• Strong legal pressure to pay.
• Often results in payment or a payment plan.

Cons of statutory demand:

• Shouldn’t be used if there is a dispute over the debt
• It may result in no payment if the tenant doesn’t have the funds.

Court proceedings

Landlords can pursue debt recovery through court proceedings. The process for recovering debt through the court can be long and complex and is probably best used when there are large or multiple sums of debt and other recovery methods have failed.

Before a landlord can obtain a CCJ (County Court Judgement), they must start with the pre-action protocol. In simple cases, this process begins by writing to the defendant to explain the reason for the court action, summarising the facts, outlining what the claimant is seeking from the defendant, and, if applicable, detailing how the amount is calculated.

Pros of going to court:

• Can recover multiple forms of debt such as rent, service charges and damages.
• Can be useful if there is a dispute over the debt.
• The outcome is enforced by the court.

Cons of going to court:

• It is expensive and time-consuming.
• The tenant could have no assets to recover debt from.
• Further actions, such as a charging order or a third-party debt order, may be required.

Summary of available actions

As you have read, a commercial landlord has multiple options available to recover rent if a tenant falls into rent arrears. However, regardless of the route you choose, please always take the opportunity to seek professional legal advice.