21st December 2020
How to Deal with a Commercial Tenant Who Hasn’t Paid Their Rent
Many commercial landlords may find themselves in a situation whereby their tenant has fallen into rental arrears. This article aims to set out how to deal with a commercial tenant who hasn’t paid their rent.
There are things that should be considered when deciding which remedy to pursue such as:
- There are other breaches of the lease
- The landlord wants possession of the property
- The non-payment of rent is an isolated occurrence
- The landlord wants to maintain the relationship with the tenant
- The solvency of the tenant
- The cost-effectiveness of the remedy sought
- There is a third party who could be pursued for the arrears.
This is the process whereby a landlord can terminate the lease as a result of non-payment of rent, constituting a breach of the lease terms.
The landlord should consider whether they think they would be able to get a new tenant in on more favourable terms, or whether they would benefit from preserving the relationship with the current tenant.
A landlord should be aware that tenants can, in certain circumstances, apply for relief from forfeiture. If it is apparent that this may apply to their tenant, then forfeiture would not be the best option to pursue. Also, once a lease has ended, certain other methods of recovery may cease to be available to the landlord.
The landlord must also ensure that they do not do anything which could amount to waiving the right to forfeit.
NB: The Coronavirus Act 2020, which came into effect 26 March 2020, restricts the ability of landlords to forfeit for non-payment of rent until 31 December 2020. There is also a new CPR Practice Direction 55C which applies to new possession claims until 28 March 2021.
Draw Down of Rent Deposit
There is the option for a landlord to draw down on the rent deposit of the tenant in order to cover the rent arrears. It should be noted that this choice would waive the right to forfeit the lease due to non-payment of rent.
In some circumstances, if allowed by the rent deposit deed, the lease can be forfeited first and then draw down the rent deposit. The solvency of the tenant should be considered here as the landlord may want to rely on other methods of recovery and save the option of rent draw down for future arrears if it looks as if the tenant will not be able to pay in the future.
Pursue Payment of From Guarantor or Former Tenant
This option can arise from a contractual guarantee or under privity of contract. Whether this remedy would apply would also depend on whether the lease was a ‘new’ tenancy for the purposes of the Landlord & Tenant (Covenants) Act 1995.
It is worth noting that if a guarantor or former tenant pays the arrears pursuant to a section 17 notice, they are then entitled to ask for an overriding lease.
This can be a costly process which lasts several months. If the landlord wants to recover the rent arrears quickly, a statutory demand might be more appropriate.
There is a 6-year limitation on bringing proceedings for rent arrears. The landlord should be aware of this. However, this option may be suitable if the landlord wants to give the tenant a while to allow them to get their finances in order and settle the debt.
Commercial Rent Arrears Recovery (CRAR)
This allows for a landlord to instruct enforcement agents to take control of the tenant’s goods in order to recover the monies due. This can be a good option if the landlord is unsure of the liquidity of the tenant.
Please note that this is only available to rent arrears and not other sums due, for example, service charge.
NB: The current regulations imposed as a result of coronavirus mean that the net rent arrears that are needed before a landlord can commence CRAR are 276 days’ rent (from 29 September 2020 until 24 December 2020 inclusive), then 366 days’ rent (from 25 December 2020).
Statutory Demand & Insolvency
A landlord can serve a statutory demand on the tenant requiring them to pay the rent arrears within 21 days. If they do not pay this, it may be deemed as evidence of inability to pay debts and can lead to bankruptcy or a winding-up petition.
This can be a good option to quickly recover sums due. However, it should be noted that if the amount due is disputed, then the statutory demand can be set aside and the landlord liable for the tenant’s costs.
Also, forcing a tenant into insolvency may reduce the chances of recovering the full amount of rental arrears due to the restriction on debt recovery in England & Wales.
NB: Current regulations imposed as a result of coronavirus restrict the presenting of debt-related winding-up petitions for companies that cannot pay rent due to the impact of COVID-19. A creditor cannot present such a petition against a company based on a statutory demand served between 1 March 2020 and 31 December 2020, nor present a winding-up petition between 1 March 2020 and 31 December 2020 based on a company’s inability to pay rent without having reasonable grounds for believing COVID-19 has not had a financial effect on the company, or that the debt issues would have occurred anyway.
This is where the tenant and landlord enter into an agreement for the tenant to pay the arrears in instalments. Such an agreement must be carefully drafted to ensure the distinction between the payment of the arrears and the payment of the rent under the lease and include certain provisions relating to termination, disposal of interests under the lease and what happens in the event of default. This option is useful if the landlord wants to maintain their relationship with the tenant.