When a tenant of a commercial premises cannot pay his rent, what options are available to the landlord to recover the arrears? While there are various options, the landlord must consider what he wants to achieve in the particular circumstances. Let’s look briefly the options for the recovery of commercial rent arrears and their pros and cons.
There is nothing stopping a landlord and tenant entering into a payment plan, whereby the tenant pays off the commercial rent arrears in specified instalments. It is usually sensible for the parties to agree the terms in writing.
þ Preserves the landlord and tenant relationship. Provides tenant with opportunity to get its house in order. Could lead to the full repayment in arrears. A good first step.
ý Further action may be inevitable if the tenant is insolvent.
Commercial Rent Arrears Recovery (CRAR)
CRAR allows the landlord to seize goods from the tenant to the value of the amount of rent arrears. The landlord must follow specific procedures and give the tenant notice. Further, the landlord must employ an enforcement agent to take control of the goods, rather than doing it himself.
þ Can be fairly quick. Tenant remains in place and the relationship can continue. Particularly effective where the tenant holds valuable goods in the premises. Can use CRAR against subtenants.
ý As notice must be given, a tenant may have opportunity to remove his goods before seizure. Can only be used for rent; not service charges or other unpaid sums.
County Court proceedings
The landlord can issue proceedings against the tenant to recover rent arrears (and/or other sums outstanding).
þ Court proceedings can be slow, giving the tenant opportunity to resolve any financial issues. The landlord and tenant relationship can continue. Negotiations can continue in the meantime.
ý Court proceedings can be slow and the landlord may not recover the arrears immediately.
Where the amount of rent arrears is not disputed, a landlord may wish to consider serving a statutory demand on the tenant. If the arrears are unpaid after 21 days and the amount is £5000 or more (or over £750 where the tenant is a company), the landlord may issue insolvency proceedings.
þ Simply serving a statutory demand is often enough to encourage payment of the arrears.
ý Cannot be used where the amount of arrears is disputed. Cannot be used for smaller sums. If the tenant is declared insolvent, the landlord may still not recover all of the arrears.
Pursue the guarantor or the former tenant
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. The procedure to follow will depend upon when the lease was originally granted, and also whether the previous tenants had signed an Authorised Guarantee Agreement.
þ Keeps the landlord and tenant relationship intact. Works well where the tenant is in financial difficulty.
ý In some situations, a landlord can only claim rent arrears going back 6 months. In some circumstances, the former tenant or guarantor may be entitled to request an overriding lease.
If the landlord took a rent deposit, he may be able to use this to pay off any arrears, depending upon the terms of the lease.
þ If the tenant is able to top up the deposit after the drawdown, this is a very simple way to recover arrears.
ý The deposit may not be sufficient to pay off all of the arrears. If the tenant has long-term financial problems, using the rent deposit will only provide a short-term solution.
This is the most severe of the landlord’s options. In brief, forfeiture is the landlord’s right to end a lease where the tenant breaches a term of the lease (including non-payment of rent and other charges). The landlord can forfeit either by commencing court proceedings, or by taking the property by peaceful re-entry (i.e. changing the locks himself). There are many elements to forfeiture and I will look at this in more detail in coming weeks.
þ The end result is final. The lease ends and the landlord is free to choose a new tenant. This is great if the landlord has another tenant lined up. The threat of forfeiture will usually prompt any solvent tenant to pay up. Especially useful where there are also other breaches of lease.
ý If the landlord does not have another tenant to move in, he may be left with an empty property. The tenant may be able to regain entry to the property through relief from forfeiture if he can remedy the breach (i.e. pay his arrears).