When a tenant falls behind on their rental repayments they are said to be in arrears. Typically, a rental agreement stipulates that rent be paid 30 days after the starting date. If a tenant has failed to pay the agreed-upon sum for 30 days after the rent was due, they are then one month in arrears, and so on so forth.

For all landlords, rent arrears are a business risk and a relatively common occurrence. For commercial property landlords, you would usually diligently vet the tenants to prevent the occurrence of rent arrears, but despite your best efforts, your tenant may fall into arrears as a result of cash-flow problems being experienced by the business. When rent arrears do happen, there are legal recourses that landlords can take to recover rent, interest and any costs incurred as a result of the late payment.

In this article, our specialist commercial property solicitors at Foys aim to discuss the various legal avenues open to commercial landlords whose tenants have rent in arrears and the best practices for exercising the options available.

Establishing rent arrears

First and foremost, a dialogue should be opened with the tenant to investigate the reasons for the late payment of rent. A notice should be provided in writing to advise your tenant that they are in arrears. This is also an important piece of correspondence should the situation escalate and you need to pursue debt recovery via a legal pathway.

While making contact with your tenant regarding the initial late payment is good practice, you are able to serve them with a mandatory notice after 2 months of rent arrears to demand payment. Depending on the circumstances, an eviction notice should also be prepared.

Avenues open for debt recovery

Upon establishing that your tenant is unable or unwilling to fulfil their contractual obligations, it’s best that you contact an independent commercial landlord solicitor who will discuss a number of legal recourses available that will facilitate a resolution – some more painless than others. The main things to consider before deciding on a particular avenue are:

  1. Whether you want to keep the tenant on board and are happy to negotiate or compromise with respect to receiving the full payment.
  2. Look into the tenant’s history and see whether they have been in arrears before.
  3. Is the outstanding debt considerable enough to warrant a pursuit by legal or other means?
  4. Will pursuing debt recovery drive the tenant into insolvency and therefore lessen the likelihood of you recovering your money in full?

Talking to our commercial property solicitors and weighing up these three questions will give you a better gauge of the suitability of the options available as well as a better understanding of which method will likely give you the best chance at recovering your rent and any interest in its entirety.

Payment agreement

If the tenant is able to convince you that their financial situation is only temporary, or you believe that given more time they will be able to pay you back in full, you can enter into a payment agreement with them which requires the payment of the outstanding amount in instalments.

This is the preferred option for commercial landlords who don’t want to ruin the relationship they’ve established with the tenant, but also want to receive what’s owed to them in full. This option should also be considered in areas where the rental market is not conducive to short-term lets and high tenant turnovers, so it may be in your interests to preserve the relationship when considering your long-term prospects.

It’s advisable that this payment agreement be drawn up by a lawyer so as to carefully outline the rent arrears is to be paid on top of the normal rental agreement. In the event that this agreement is reneged on, the landlord reserves the right to forfeit the lease.

Drawing down on the rent deposit

If the initial rental agreement included a rent deposit, the landlord is within their rights to draw from this deposit in order to recover rent arrears – as long as the lease contract stipulates this. The tenant must then top up the deposit within a certain amount of time. This is the best course of action for commercial landlords that require a quick recovery of outstanding rent – however, it is only a short-term solution, so if the tenant is in a precarious financial situation, it’s not always advisable.

Serve a statutory demand

If your commercial property is being leased by a company and owes more than £750, you’re entitled to serve the tenant with a written demand for payment. This document needs to comply with statutory requirements, but once served, the tenant has 3 weeks to pay before you commence legal proceedings against them for insolvency or winding up of the company.

Forfeiture

In the event that rent has not been paid on time, usually for a period of between 14 and 21 days, a commercial landlord can “re-enter” a premises (when the tenant is not present) and change the locks – this is known as forfeiture. If the tenant is insolvent, then this is often the most economically viable option as it forces the tenant to pay up or face the potential loss of their business. Forfeiture is a tricky avenue to go down, so consulting an expert landlord solicitor such as Foys is always advisable – particularly if unsure of the rules surrounding this principle.

Pursuing a guarantor

If the tenant has a guarantor under the lease, then it is possible for a landlord to pursue them for the rent in arrears, rather than the tenant directly.

CRAR

The Commercial Rent Arrears Recovery Act 2014 is a legislative attempt to protect the rights of landlords by enabling them to employ an enforcement agency who will assume possession of a tenant’s goods for sale in order to recover debt. This is a complex process that requires various notices to be served on the tenant, and certain conditions need to have been met before the repossession can occur. CRAR should be considered carefully as it can only be used to recover rent, and entails waiving your right to forfeiture.

Issue Court Proceedings

Issuing court proceedings are often the last resort as they can be time-consuming and also expensive.

If you’re a commercial property owner or landlord who wants to know more about the possible avenues for recovering debt or you currently have a tenant whose rent is in arrears, speak to one of our specialist commercial property solicitors first. We can provide bespoke guidance as to the best practices for your commercial property, as well as assisting you with deciding on the best course of action for recovering full payment without breaking the bank.

To get in touch simply fill out our Online Form or call your local Foys Solicitors office:

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This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.

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