At some point in time, most landlords will have to deal with commercial rent arrears – as and when the situation arises, what are the options available to the landlord to recover the debt? Circumstances surrounding commercial rent arrears and the significance of a commercial tenant falling into rent arrears very much depends on the terms agreed to in the lease, but there are a number of options for a landlord to take:
Forfeiture, or “re-entry”, is the landlord’s right to terminate the lease if the tenant is in breach of any of its covenants.
If rent remains unpaid for a specific period of time (usually between 14 and 21 days), most commercial leases provide for the landlord to have the right of re-entry. If the provisions for re-entry within the lease have been fulfilled, the landlord can in the majority of cases peaceably re-enter the property and recover possession, thus terminating the lease. In practical terms, this is done by entering the property and changing the locks. The landlord needs to ensure that nobody is occupying the property at the time of re-entry.
There are several questions the landlord will need to decide whether it makes commercial sense for it to forfeit the lease. Speak to our Commercial Team for guidance
Commercial Rent Arrears Recovery (CRAR)
In April 2014, commercial rent arrears recovery (CRAR) was introduced. The ‘CRAR’ procedure allows for a commercial property landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover the value of the rent arrears. Multiple notices must be served on the tenant setting out specific information at various stages throughout the procedure being used.
The threat of removing items, crucial to the successful running of the tenant’s business, e.g. IT, computers, printers, phones, desks, chairs, etc. can often be a strong stimulus for the tenant to pay the rent arrears so that it can continue to trade.
Landlords should, however, think carefully about using the procedure because doing so will waive any right to forfeiture that may have arisen.
Pursuing a sub-tenant
Where the tenant sub-leases the property, a landlord can serve a notice requiring the sub-tenant to pay the rent it owes to the landlord directly rather than to the tenant. To do this, a landlord must serve a notice on the sub-tenant setting out the amount of rent the landlord has the right to recover from the tenant using the CRAR procedure.
Drawing down on a rent deposit
Landlords should check whether a rent deposit deed was entered into at the time of the lease agreement. If there was, the landlord may draw down from the rent deposit paid by the tenant. The landlord will need to give the tenant notice that the draw-down is being made. The tenant will also be required to put further funds into the rent deposit account to replenish those funds which have been drawn down.
This option can often be a useful method to recover a proportion of the commercial rent arrears due, but seldom the entire amount.
Pursuing a guarantor
Where a third party (person or company) has agreed to act as a guarantor for the tenant’s covenants under the lease, the landlord has the right to consider pursuing them if the tenant is in commercial rent arrears. Depending on the provisions contained within the lease and the guarantee given by the guarantor, the landlord would usually issue court proceedings to enforce the guarantor’s obligations.
Serving a statutory demand
A further option open to the commercial landlord is serving a statutory demand. This is a written demand for payment which complies with certain statutory requirements, and which is served upon the tenant. The amount demanded and owed by the tenant must be more than £750 (if the tenant is a company) or more than £5,000 if the tenant is an individual. If payment is not made by the tenant within three weeks, the landlord can issue a petition to wind up the tenant’s business, which can often result in the commercial rent arrears being paid swiftly.
Issuing court proceedings
Landlords can issue court proceedings to recover the rent arrears owed by the tenant but this is usually a last resort as it can be a lengthy and expensive process.