Commercial landlords – options when tenants fall into arrears

Faced with rising operating costs, tenants may find it increasingly more difficult to meet their liabilities under their commercial leases.

Elizabeth Shaw, Director and head of litigation services at Wake Smith Solicitors looks at the commercial landlord’s options.

This article covers:

• Monetary Judgments
• Statutory Demand
• Forfeiture/Re-entry
• CRAR – Commercial Rent Arrears Recovery

• Guarantors
• Rent Deposit Deed
• Negotiation/Instalments

What are the commercial landlord’s options?

Monetary Judgments
A landlord can issue a standard claim at Court and obtain a monetary Judgment for rent arrears.  However, the Judgment is still only a piece of paper and will have to be enforced if a tenant fails to pay rent. 

The success of enforceability will depend upon whether the tenant has any assets worth pursuing.  Accordingly, a landlord should take a good look at the tenant’s financial position before incurring further costs to avoid throwing good money after bad.

Before proceedings can be issued, the landlord has to comply with the Pre-Action Debt Protocol if the tenant is an individual or the default pre-action protocol for a corporate tenant.

Statutory Demand
Serving a Statutory Demand gives the tenant 21 days to pay the debt failing which the landlord can apply to wind-up the tenant company or issue bankruptcy proceedings against an individual tenant.  A Statutory Demand can be a very cost-effective tool in flushing tenants out.  It has serious consequences if the Demand is not complied with. 

That said, if the threat of subsequent action by serving a Statutory Demand does not persuade the tenant to pay, the Landlord will then need to consider the costs risk benefit of presenting a Winding-up or Bankruptcy Order. 

Both are quite expensive as the landlord has to pay a deposit to the Official Receivers office as part of the petition fee.  All creditors will rank equally in the winding-up or the bankrupt’s estate and the likelihood of a return is key.

Forfeiture/Re-entry
Forfeiture is a special right given to a landlord which allows the lease to be determined by the landlord peaceably re-entering the property. There should be provision in the lease to allow this.

Landlords have to consider what is more important as it will expose the landlord to liability for business rates and other utility costs if the premises are then vacant for awhile before a new tenant is lined up. Equally, there is little point in allowing rent arrears to build up if the tenant is not going to be in a position to pay rent going forward and clear the arrears.

The landlord also has to be careful not to waive the right to forfeit by treating the lease as continuing once it is aware that arrears are owing and the right to forfeit has arisen.

CRAR – Commercial Rent Arrears Recovery
CRAR allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them at auction to recover monies equivalent to the rent arrears. This is only appropriate if the tenant is asset rich.  It is not appropriate where the tenant owns perishable goods or goods on HP. A particular process has to be followed and advice should be sought.

Guarantors
Action can be taken against guarantors if the tenant defaults. The terms of the guarantee can be quite specific.  Advice should be obtained on the wording of the guarantee and what steps need to be taken to enforce it. Guarantors can be pursued in tandem with the tenant or separately. There are strict time limits to follow in relation to action against former tenants and guarantors of former tenants. 

Rent Deposit Deed
If the tenant has paid a Rent Deposit, this can be drawn against.

The Deed should contain a process by which the rent deposit is then topped up by the tenant.

Negotiation/Instalments
If there is a willingness from both parties, usually temporary difficulties can be resolved by way of instalment payments or allowing monthly rather than quarterly payments of rent.

Care should be taken to draft a short form Settlement Agreement/side letter to incorporate settlement terms by way of instalments/ a change to monthly payments of rent to cover what happens in the event of default and avoid variation of the lease.

What to do next?
Professional advice should always be sought before taking any action. Which is the most appropriate form of action for a commercial landlord will vary from case to case.

For further advice on commercial landlords’ options when tenants fall into arrears contact Elizabeth Shaw, Director at Wake Smith Solicitors on 0114 224 2041 or email [email protected]

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Published 14/02/2023