When a commercial tenant stops paying rent, the arrears can quickly become a significant problem for the landlord. You may still have mortgage payments, insurance, maintenance and other costs associated with the commercial property, while the income you expected from the premises has stopped.
Fortunately, a commercial landlord has several options for dealing with unpaid rent. Depending on the commercial lease and the circumstances, these can include negotiating a payment arrangement, using a rent deposit, Commercial Rent Arrears Recovery (CRAR), bringing a debt claim, serving a statutory demand or seeking to forfeit the lease.
The right approach will depend on how much is owed, why the tenant is not paying the rent, whether you want the tenant to remain in occupation and what the lease allows.
AFG Law’s Dispute Resolution team can advise landlords where a commercial tenant has fallen into arrears and help determine the most appropriate way to recover the money or bring the lease to an end.
Start by checking the commercial lease
Before taking enforcement action, check the terms of the lease carefully. The lease should establish when each rent payment becomes due, whether interest is payable on overdue amounts, whether there is a rent deposit and what rights the landlord has following non-payment.
It should also contain the forfeiture provisions. These are particularly important if you are considering terminating the lease.
You should establish exactly what is outstanding and whether the tenant disputes any part of the amount claimed. The options available to landlords and tenants can be affected considerably where there is a genuine dispute about what is owed.
Should I speak to the tenant first?
Not every missed payment needs to result immediately in legal action. If a previously reliable tenant is temporarily struggling to pay, it may make commercial sense to establish what has happened. A short-term payment plan could produce a better outcome than immediately losing a tenant and being left with an empty property.
However, any arrangement should be documented properly. If you agree that arrears can be paid by instalments or temporarily alter the payment arrangements, the agreement should make clear what has been agreed and what happens if the tenant defaults again.
A landlord should also be careful about accepting rent after becoming aware of a breach if forfeiture is being considered, as certain actions can waive the right to forfeit for that particular breach.
Can I use the rent deposit?
If you hold a rent deposit, the rent deposit deed should explain when money can be withdrawn and whether the tenant must replenish the deposit afterwards.
Using the deposit can provide a relatively quick way of covering arrears, but it does not necessarily solve the underlying problem. If the tenant stops paying because the business is experiencing serious financial difficulties, using the deposit may simply delay the next missed payment. The deposit documentation should therefore be checked before money is withdrawn.
Can I use Commercial Rent Arrears Recovery?
Commercial Rent Arrears Recovery (CRAR) is a statutory procedure allowing qualifying commercial landlords to instruct an enforcement agent to take control of a tenant’s goods to recover unpaid rent.
CRAR is subject to specific conditions and applies to qualifying leases of commercial premises. It is focused on rent and does not simply allow a landlord to recover every sum that may be due under the lease.
A notice of enforcement must generally be given before an enforcement agent takes control of goods. The standard minimum notice period is seven clear days. Different provisions apply in some circumstances, including where CRAR is pursued against a subtenant, where 14 days’ notice applies.
CRAR can be a useful enforcement option, particularly where the tenant continues trading from the premises and has goods against which enforcement can be taken. However, landlords should consider its suitability alongside their wider strategy for the lease.
Can I forfeit the commercial lease for unpaid rent?
Potentially. If the lease contains an appropriate right of re-entry or forfeiture, non-payment of rent can give the landlord a right to bring the lease to an end.
Forfeiture can potentially take place through peaceable re-entry or through court proceedings. HM Land Registry’s guidance confirms that a lease containing a forfeiture provision may allow a landlord to forfeit because rent has not been paid, either by court proceedings or peaceable re-entry.
The exact point at which the right arises should be checked against the lease. Some commercial leases provide for forfeiture once rent has remained unpaid for a specified period, which could, for example, be 14 days or 21 days. This is why the wording of the particular lease matters rather than assuming there is a universal waiting period.
Peaceable re-entry is a significant step and should not be attempted casually. The circumstances of the occupation and the practical method of re-entry need to be considered carefully.
Can the tenant get the lease back after forfeiture?
Forfeiture does not necessarily mean the matter is over. A tenant may apply to the court for relief from forfeiture. The court has discretion over whether relief should be granted and on what terms.
Where forfeiture relates to rent arrears, payment of the outstanding sums can be highly relevant. A landlord considering forfeiture should therefore understand both the immediate effect of terminating the lease and the possibility of a subsequent relief application.
Can I take the tenant to court for unpaid rent?
Yes, a landlord may be able to bring a straightforward debt claim to recover rent and other sums properly due under the lease. This can be appropriate where your main objective is to recover the money rather than end the tenancy.
If the landlord obtains judgment and the tenant still fails to pay, further enforcement options may be available. For example, a warrant of control can allow enforcement agents to take goods to satisfy an unpaid judgment.
Before commencing court proceedings, it is worth considering the tenant’s financial position. Obtaining judgment against a company with no money or assets does not guarantee that the landlord will actually recover the debt.
What about serving a statutory demand?
A statutory demand may be another option where a debt is clearly due and undisputed. Once a statutory demand has been served, the debtor generally has 21 days to pay the debt or reach an agreement to pay it. If a company does not deal with the demand and the relevant requirements are satisfied, the creditor may then be able to pursue winding-up proceedings.
However, insolvency procedures should not be treated simply as an alternative debt collection process where there is a genuine dispute about the debt. Whether a statutory demand is appropriate should therefore be considered carefully before it is served.
Which option should a commercial landlord choose?
There is no single answer for every case. If you have a good tenant experiencing a temporary cash-flow problem, an agreed repayment arrangement may preserve a valuable commercial relationship. If you primarily want the arrears paid, CRAR or a debt claim may be appropriate. If the tenant is repeatedly defaulting and you want possession of the premises back, forfeiture may need to be considered.
It is also important to think strategically. Taking one step can affect the options available later, particularly where forfeiture is concerned. If your commercial tenant has stopped paying rent, getting advice early can help you avoid inadvertently weakening your position while the arrears continue to increase.
AFG Law’s Dispute Resolution team can advise commercial landlords on rent arrears, rent deposits, CRAR, forfeiture and the options available to recover unpaid rent. Contact us to discuss your commercial lease and the most appropriate next steps.