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Tenant rent arrears and landlord options - the basics

Director, Rob Cooke, highlights the options available to a landlord of commercial property when a tenant has not paid its rent.


Problem

Where the tenant is failing to pay the rent and other sums due under the lease, there are a number of possible remedies the landlord can pursue to remedy the breach and recover the payment.  The landlord must assess what the most appropriate remedy is in the particular set of circumstances.  Prior to deciding on which remedy to use, the landlord will have to consider the following points:-

  • Are there any other breaches of the lease that also require remedy?
  • Is there an isolated incident or are there persistent delays in paying rent?
  • Does the landlord want the property back or does he want to maintain the landlord and tenant relationship?
  • How solvent is the tenant generally and will the remedy pursued push the tenant into an insolvency situation, which might inhibit the landlord’s recovery of money?
  • How cost efficient is each remedy balanced against how long it will take to get payment of the arrears?
  • Is there a third party who could be required to pay arrears?

Option 1 – Forfeiture

This is the landlord’s right to determine the lease where the tenant is in breach of any of his obligations under the lease such as non-payment of rent. 

Considerations for the Landlord

Is it in the landlord’s commercial interest to take the property back?  If the landlord believes that a new tenancy could be granted on similar or superior terms he may want to take the property back.  However, if the property is likely to be vacant for some time, or the market no longer supports similar letting terms, the landlord may want to keep the existing tenancy in place, and instead pursue alternative remedies and secure the future performance of the tenant’s covenants.

The landlord should also consider the ease with which a tenant can obtain relief from forfeiture for non-payment of rent.  It is likely, and in some situations automatic, that the tenant will obtain relief from forfeiture if he pays all arrears, interest and costs.  This is an important point especially if there are other breaches of the lease.  If the tenant obtains relief from forfeiture, the landlord could find himself having to allow the tenant back into occupation without any resolution of the other breaches. 

If the landlord forfeits the lease, he should also have a clear plan as to how he will recover the debt if the tenant does not apply for relief from forfeiture.  One of the other methods of recovery will have to be followed, and some may no longer be available once the lease has come to an end. 

Waiver

Where the right to forfeit a lease has arisen and the landlord is considering re-entry, care must be taken that nothing is done to waive that right.  If the landlord performs an act that recognises the lease as continuing to exist this could amount to an act of waiver and mean that the landlord can no longer forfeit it until a new breach arises.

Option 2 – Draw down on rent deposit

The landlord may be able to draw down from a rent deposit to cover the rent arrears or other sums due under the lease. 

Points to consider

If the tenant’s long term solvency is uncertain, and there are other methods to recover the debt, the landlord might want to utilise them and maintain the rent deposit for any future arrears.  On the other hand, if the arrears of rent are an isolated incident, and the tenant is able to top up the rent deposit, this is a quick and simple method of recovering the debt which allows the landlord and tenant relationship to continue.

It is worth noting that a drawdown on the rent deposit will waive the right to forfeit.  The wording of the rent deposit deed should be considered and, if allowed, the landlord may first forfeit the lease and then draw down the rent deposit if the landlord wants to take the property back.

Option 3 – Pursue the guarantor or former tenant

The landlord may be able to recover rent arrears or other sums due under the lease from any guarantors or former tenants under the lease either by way of a contractual guarantee or under the privity of contract rules.

Points to consider

If the arrears are being demanded from a former tenant then you should consider serving a Notice of sub section 17 of the Landlord and Tenants (Covenants) Act 1995.  A landlord can only recover the last six months worth of arrears.  It is however possible to serve a succession of section 17 Notices, each relating to a different rent payment, so long as the Notices are served within that six month time limit.  A landlord should also consider that if a former guarantor or tenant pays the arrears pursuant to a Notice under section 17, the former guarantor or tenant is entitled to ask the landlord for an overriding lease and therefore the landlord must decide whether it would be satisfied with the former tenant or guarantor as its direct tenant.

Option 4 – Court proceedings to recover debt

Points for the landlord to consider

The appropriate process can be expensive and protracted.  A Court hearing may not be set for several months and the tenant may not feel any impetus to pay the arrears in this period.  If the immediate payment of arrears is desired, serving a statutory demand, which requires payment in 21 days, may be more appropriate.

However, if the landlord wants to give the tenant time to get it’s financial affairs in order and pay the arrears, presuming the landlord entered the relationship, Court proceedings may be the most appropriate way of taking action to obtain unpaid rent.

Option 5 – Commercial rent arrears recovery (CRAR)

Commercial rent arrears recovery is a method of enforcement for recovering rent arrears relating to commercial property.  CRAR can also be used to recover rent arrears from an under-tenant and this may be a useful option if the under-tenant is better placed to pay than the head-tenant.

Points for the landlord to consider

CRAR is only exercisable against arrears of principal rent and therefore if any of the arrears relate to service charge, insurance rent or other sums due under the lease, CRAR cannot be used to recover them.  However, if the landlord is unsure about the tenant’s assets and liquidity, CRAR is a good method to recover at least the principal rent that is in arrears.

Option 6 – Statutory demand and insolvency proceedings

Where there is no dispute about the amount of the debt and it exceeds £750 the landlord can serve a statutory demand on the tenant.

Points to consider

Often, simply threatening insolvency proceedings can be effective to produce payment of rent.  A statutory demand must be satisfied within 21 days or the tenant can be faced with a bankruptcy or winding up petition.  This can encourage the tenant to prioritise the rent arrears and pay quickly, as opposed to the threat of Court proceedings, which can give the tenant several months before a hearing and having to face any repercussions for withholding rent.  However, if there is any dispute as to the debt, a landlord could end up being liable for significant costs.

Option 7 – Payment agreement

If the tenant needs time to pay the arrears, the landlord may want to consider entering into a payment agreement with the tenant, requiring the tenant to pay the arrears in specified instalments. The payment agreement must be carefully drafted and a clear distinction must be made between payment of arrears under the payment agreement and continued payment of the rent under the lease.  The payment agreement should also cover the full payment of any outstanding arrears if either party disposes of its interest in the lease or if there is any default by the tenant in meeting any of the payment agreement deadlines.

The advantages of entering into a payment agreement are that it will preserve the landlord into a relationship and provide some time for the tenant to resolve any financial issues it may have.  If the payment agreement is successful this will also result in full payment of the rent arrears.  If the tenant is generally solvent and the arrears are an isolated incident this may be a sensible way to proceed.  However it could also delay the inevitable of pursuing other methods of recovering the money if it is not correctly drafted.

Conclusion

As can be seen, there are always several options open to a landlord in relation to tenant rent arrears.  It is important that the landlord takes advice on these options as each situation requires an assessment of the tenant’s financial stability together with the risks for a landlord.  I think it important that a landlord takes at least basic advice at a very early stage so that informed decisions can be made having taken account of the individual circumstances of the landlord and tenant relationship. 

If you wish to discuss this article further or would like more information, please contact Rob Cooke.

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