Tenants falling into arrears is a common issue for commercial landlords. You want to recover the rent owed as quickly as possible, but it’s important to take the time to understand the reasons behind your tenant’s arrears and the options available to you. There are pros and cons to each one so it’s essential to consider every option before committing to a course of action.
Forfeiture
Forfeiture is the landlord’s right to bring a lease to an end if the tenant is in breach. There must be a clause within the lease that enables the landlord to do this and certain circumstances must be met. There are two ways that a landlord can enforce forfeiture; either by peaceable re-entry (re-entering and taking back possession of the property) or by issuing court proceedings.
For certain types of breach (particularly non-payment of rent), forfeiture can provide a fast a cost-effective solution that enables the landlord to dispose of a problem tenant and remarket the property. However, there are downfalls to this method as it may be difficult to find a new tenant if the property market is poor. This could leave landlords with an empty property, liability for the property’s rates and outgoings and a loss of rental stream for an undetermined amount of time. Additionally, forfeiture always carries an element of uncertainty as the tenant will always have a statutory right to apply to court for relief.
Advice should always be obtained when considering forfeiture as the rules governing how and when the right may be exercised (if it is available at all) are complex. It is prudent to seek assistance from a solicitor early on in the process to that your position can be preserved.
Guarantors or former tenants
If there is a guarantor under the lease, the landlord may be able to pursue them for any sums owed by the tenant. In some cases, the lease may include a clause that would make the previous tenant liable for settling any rent arrears by the current tenant.
It is important that the landlord reviews the lease carefully to see if there are any limitations with this method and to seek legal advice when needed.
Rent deposits
If a rent deposit was obtained, the landlord may apply this against outstanding arrears by following the procedure set out in the rent deposit deed.
Drawing down the rent deposit can be a good way for landlords to recover costs quickly, particularly if it is an isolated incident. The tenant will usually be required to top-up the deposit back to a minimum amount within a set number of days.
However, if the tenant is regularly behind with the rent then this method may not be appropriate. It is also worth noting that by drawing down the deposit, the landlord waives their right to forfeit the lease.
Commercial rent arrears recovery (CRAR)
Commercial rent arrears recovery (CRAR) is the procedure where bailiffs are sent to the property to take control of goods which can then be sold and the proceeds used to settle outstanding arrears.
Although this method may be a quicker way to recover the funds owed, it can be very complex and various conditions must be met before the bailiffs can go in including the service of a number of notices on the tenant. Also, this process only applies to rent arrears and cannot be used to recover debt relating to things such as insurance rent or service charges.
Statutory demand
If the amount of arrears is undisputed, then the landlord may be able to serve the tenant with a statutory demand. This gives the tenant 21 days to make payment before bankruptcy proceedings may be commenced.
The benefit of this method is that tenants may be prompted to make a payment once receiving the demand. However, if the tenant is on the brink of bankruptcy, then this method may be ineffective as they will already be alive to the prospect of bankruptcy proceedings.
It may be beneficial to both landlord and tenant to agree upon a payment plan in which to pay back the debts owed. By doing this the landlord preserves a good relationship with the tenant, protects their rental stream and the tenant can continue to trade.
Court proceedings
Taking a tenant to court may be necessary if other, less extreme, measures prove unsuccessful. If the tenant disputes the outstanding arrears then it may not be possible to resolve the issue without a court determination. Obtaining a money judgment for the arrears can also create other enforcement options, for example, by enabling the landlord to apply for a ‘third party debt order’ if the tenant is owed money by another person or a ‘charging order’ if the tenant owns other property.
The drawback with court involvement (particularly in defended claims) is the cost. Although it may be possible to recover some or all of your legal fees if you are successful at trial or if you settle, it may be that the tenant does not have sufficient assets to pay for the arrears and any costs awarded against them.
Get expert advice on landlord and tenant disputes
For advice on recovery of rental arrears, speak with Hugo Haub, or another member of our landlord and tenant disputes team on 01202 292424.