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Commercial Real Estate: What can a Landlord do if a Tenant fails to pay rent?

View profile for Craig Walker
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There are a range of remedies available to landlords of commercial properties where the tenant has stopped paying rent. Below is a brief summary of options that may be appropriate in the circumstances.

Rent Deposit Drawdown

If a deposit has been received from the tenant at the start of the lease, a landlord may be able to use the deposit to cover the rent arrears. This will depend on the wording of the Rent Deposit Deed. Landlords should consider whether the missed rent payment is an isolated incident. If so, it may be practicable to use the rent deposit to cover the missed payment, and make arrangements with the tenant to top-up the deposit as necessary. However, if the landlord is concerned that the tenant may be in longer-term financial difficulties, the landlord may wish to pursue alternative remedies.

Payment Agreement

The landlord could consider entering into a Payment Agreement with the tenant 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. The Payment Agreement will need to be carefully drafted to include termination provisions in the event that the tenant defaults on any of the agreed payment deadlines.

Forfeiture

The landlord may consider that the tenant is unlikely to be able to meet its rental obligations even if the current arrears are cleared. If this is the case the landlord can choose to forfeit the lease.

A landlord of a commercial property will usually have the right to forfeit the lease (ie. the right to re-enter the premises and recover possession, thereby terminating the lease) if rent is overdue by a specified period (commonly 21 days).

A landlord can effect forfeiture either by “peaceably re-entering” the property (entering the property and changing the locks, often through certificated bailiffs) 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.

Pursuing a former Tenant or Guarantor

The landlord may be able to recover rent arrears from a former tenant or former guarantor. The categories of person the landlord may be able to sue will depend on whether the lease is a “new” tenancy for the purposes of the Landlord and Tenants (Covenants) Act 1995. The landlord must serve a notice in the prescribed form on the former tenant or former guarantor within six months of the arrears falling due if he wishes to recover the arrears from them.

Commercial Rent Arrears Recovery (CRAR)

The CRAR regime 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. The tenancy must be in writing for CRAR to apply.

Sub-Tenants

Rather than taking control of a tenant’s goods, where there is a sub-tenancy the CRAR regime also allows a superior landlord to recover its arrears by serving notice on any sub-tenant requiring them to redirect rent to it whilst its immediate tenant is in arrears. The notice will take effect 14 clear days after service. This procedure is similar to, and replaces, the old notice procedure pursuant to section 6 of the Law of Distress (Amendment) Act 1908.

Court Proceedings

If the landlord does not wish to forfeit the lease but merely seek payment of the arrears, it 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 (which will normally be the case for non-payment of rent), the landlord can serve a statutory demand requiring the tenant to make payment. In order to use the statutory demand 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.

Often the prospect of a winding-up or bankruptcy petition being issued is sufficient to prompt a tenant to pay the outstanding rent. However, if the tenant disputes the debt due on substantive grounds, the tenant can apply to court within 18 days of service to set aside the demand which can lead to the landlord becoming liable for costs if the tenant is successful.

Summary

There are a range of options available to landlords where a tenant has failed to pay rent and the most appropriate option will depend on the circumstances. 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.

This article was written by Craig Walker, Partner, with assistance from Elizabeth McClenan, trainee solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.