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Commercial Rent Arrears: The Road to Recovery

For landlords of commercial premises, one of their main concerns is making sure that the tenant pays all sums due under the lease, says commercial property agent Prop-Search.

Unfortunately this doesn’t always happen and when a tenant cannot pay the rent, landlords are faced with various options.  However, the circumstances of any arrears and the leases will no doubt be different in each case and careful consideration should be given to the end objective in each particular circumstance.

David Robbins, Head of Management of Prop-Manage - the property management arm of Prop-Search - says: “There are a range of options available to landlords where a tenant has failed to pay.  Before deciding how to proceed, suitably advised landlords should think carefully about what they want to achieve, including whether to preserve the landlord and tenant relationship, and the likely costs and consequences of the different options.”

Payment Agreement
A landlord could consider entering into a payment agreement whereby the tenant agrees to pay the arrears in instalments.  This is of benefit where the parties are keen to preserve the landlord/tenant relationship and the tenant has a realistic prospect of being able to pay the arrears in addition to the ongoing rent.  Any such agreement needs to be carefully drafted to include termination provisions in the event that the tenant defaults on any of the agreed payments or deadlines.

Commercial Rent Arrears Recovery (CRAR)
CRAR came into force on 6 April 2014 - replacing the old law of distress - and allows a landlord to instruct an enforcement agent to take control of a tenant’s goods.  These can then be sold in order to recover an amount equivalent to the rent arrears.  Various notices must be served on the tenant by the enforcement agent at each stage of the process and a tenancy must be in writing for CRAR to apply.

Court proceedings
If the landlord does not wish to forfeit the lease but merely seek payment of the arrears, he can issue proceedings to recover the arrears but without also seeking an order for possession.  Court proceedings can be costly and time consuming and may not be cost effective if the tenant does not have the means to pay the arrears or the arrears are not substantial.  However, a solicitors’ formal letter before claim threatening proceedings can often prompt tenants to pay the arrears swiftly.

Statutory Demands
For undisputed debts, the landlord can serve a statutory demand.  In order to use this procedure, the minimum amount of the debt needed is £750 if the tenant is a company or £5,000 if the tenant is an individual.  If payment is not made within 21 days, the landlord may then issue a bankruptcy or winding-up petition.  However, if the debt is disputed on substantive grounds, the tenant can apply to court within 18 days to set aside the demand which can lead to the landlord becoming liable for costs if the tenant is successful.

Previous tenants and guarantors
The landlord may be able to recover rent arrears and/or other outstanding sums from a guarantor, former tenant, or even a former tenant’s guarantor.  This will depend upon when the lease was originally granted, and also whether the previous tenant has signed an Authorised Guarantee Agreement on any lease assignment.  The landlord must serve a Section 17 notice in the prescribed form on the former tenant/guarantor within six months of the arrears falling due if he wishes to recover the arrears from them.  However, the former tenant or guarantor also has a right to call for an overriding lease.

Rent deposit
The tenant may have provided a rent deposit, though this will usually be a last resort when seeking to recover unpaid sums as it’s preferable to keep this ready-source of money available for a time when all other options fail.  If the landlord does decide to use the rent deposit, drawing against it is a quick and easy way of getting money that is owed.  However, the drafting of the deed will need to be checked carefully as it limit withdrawals for unpaid principal rent and may require that the tenant be given notice before any withdrawal is made: an unpermitted withdrawal will give rise to a claim against the landlord.

Forfeiture
A landlord will usually have the right to forfeit the lease - the right to re-enter the premises and recover possession, thereby terminating the lease - if rent is overdue by a specified period.  A landlord can effect forfeiture either by ‘peaceably re-entering’ the property or by commencing court proceedings for possession of the property.  Such court proceedings will usually include a claim for payment of the arrears which would have to be pursued separately if the landlord effected forfeiture by way of peaceable re-entry.  The landlord must take care not to waive the right to forfeit by doing something which recognises the continuing existence of the lease.  This includes demanding or accepting rent after the right to forfeit has arisen.  Tenants may also apply for relief from forfeiture and will usually be granted relief if they pay the arrears and costs of the proceedings.

Further information or advice can be obtained from Prop-Search - Tel: 01933 223300 / 01604 492000 or its website: www.prop-search.com


11 October 2017