Commercial property dispute resolution specialist Eleanor Longworth gives an overview of a commercial landlord’s options when a tenant isn’t paying rent and is in arrears.
Forfeiture is the right to re-enter the property and bring the lease to an end. As referred to in our previous blog exploring how landlords can forfeit a commercial lease, in most cases, where the lease contains an express forfeiture provision forfeiture is an option for landlords.
Careful consideration needs to be given to the decision to forfeit though and you can discover more information about the pros and cons in forfeiting commercial property leases here. A crucial factor for landlords is whether they will be able to re-market the property. It is of little commercial advantage for landlords to have empty properties.
Landlords need to be careful not to waive the right to forfeit once it has arisen. This commonly occurs when a landlord demands and accepts rent, following the right to forfeit arising. It is easily done when automated demands are sent out.
Forfeiture in itself will not result in recovery of the debt, so landlords will have to look at alternative means of recovering the arrears.
Guarantors or former tenants
Landlords may have a contractual right to pursue parties, other than the tenant. A guarantee may have been given by a third party, when the lease was entered into, or by the former tenant when the lease was assigned. In certain instances, landlords can pursue former tenants without a formal guarantee being given.
Landlords should be aware that statute intervenes and a formal notice has to be served upon the former tenant or former guarantor within six months of the rent falling due. If the arrears are paid, the former tenant or guarantor can ask for an overriding lease.
In some instances, landlords will have the benefit of a rent deposit. The circumstances in which a landlord can draw down on the deposit are commonly determined by a deed.
Rent deposits are often useful for one-off defaults in payment when the tenant can afford to top up the deposit account. If the tenant’s financial position is uncertain, a landlord may prefer to sit on the deposit, consider other options and draw down as a last resort.
This can be an effective tool to prompt payment however, it can be a protracted process and costly.
Commercial rent arrears recovery
Commercial rent arrears recovery is a formal procedure available to landlords where bailiffs are sent to the property to recover rent arrears. It’s only available to recover rent. Landlords cannot recover other sums using this method, meaning alternatives must be used to help recover all outstanding amounts.
If the debt is undisputed landlords could consider serving the tenant with a statutory demand. This allows the tenant 21 days to make payment, failing which insolvency proceedings may be issued. This sends a stern message and can be useful at prompting payment, if the tenant has any assets.
In cases where the tenant is on the brink of insolvency and is ultimately wound up or adjudged bankrupt, landlords rarely recover all outstanding debts. The rate of recovery is often nominal.
Landlords may have a number of options available to them however, some are costly and can make it difficult for tenants to survive and continue trading.
If the objective is not to obtain possession of the premises landlords may wish to consider informal mechanisms, such as agreeing a payment plan. The landlord and tenant relationship would be preserved, the tenant may survive and the landlord’s rental stream protected.