Tenants Who Fail To Pay
What are the options for commercial landlords when a tenant fails to pay?
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Be proactive and open to compromise
There is no silver bullet for landlords. Tenants who can’t or won’t pay are a pain. However, being pro-active can improve your chances of rent recovery.
If you suspect a tenant may be in financial difficulty, then open and clear communication – preferably face to face – is often the best place to start. Avoidance is usually unhelpful. It can be in your own long term best interests to listen calmly and non-judgementally to requests to vary the frequency or amount of rent. Although traditional UK leases provide for the rent to be paid quarterly and in advance, more and more commercial tenants are looking to pay their rent monthly and this can help with cashflow not only for the tenants but also for the landlord.
Compromise arrangements that vary the terms of a lease
Any arrangement that makes sure the rent, or even just part of it, continues to be paid, may be better than getting no rent at all. Care should be taken so that you do not inadvertently compromise more than intended. For example, if you have agreed to accept part payment of rent than you should be very clear as to whether:
• Part payment is accepted in ‘full and final settlement’ of the debt; or
• The balance is to be collected in instalments or a lump sum;
• The deadline for making up any shortfall;
• Whether interest will accrue in the meantime (usually at a punitive default rate specified in the lease)
Any agreement with the tenant is essentially a variation of the lease terms. Because a lease document is invariably executed as a deed, it can only be legally varied by deed. We can draw up a short and simple ‘Deed of Variation’ which gives a fast and cost-effective binding document, ensuring that any compromise is made watertight with no “wriggle room” further down the line.
What can you do if the tenant has stopped paying completely?
Know your tenant. Keep yourself up to date with their business. The most obvious sign that a tenant is in difficulty is the failure to pay rent (or any other charges due under the lease) as they fall due.
Sometimes there are earlier indicators, such as requests to vary the rent payment provisions, to assign or sub-let the lease. Or it may be obvious that market factors are impacting on your tenant.
A well-informed landlord is better placed to decide which legal remedy is most likely to achieve their desired outcome. There are several legal remedies available to a landlord to recover rent or re-possess the property and their suitability depends on the individual circumstances and the landlord’s future plans for the property, always of course operating within the existing market forces.
Remedies – options for when things go wrong
Court proceedings for debt recovery
This is a common course of action and a Court Order may be easily obtained. However, judgement is only really an effective solution if the tenant is solvent and has assets against which the order can be enforced.
Forfeiture
Using the remedy of forfeiture or peaceable re-entry (also known as ‘changing the locks) if often a cheap and effective means of bringing the relationship to an abrupt end. Professional advice is a must as there are plenty of hidden legal traps. Forfeiture is a heavy blunt instrument of a legal remedy and failure to use it properly can make matters infinitely worse.
Landlords must remain alert to the tenant’s right to apply to court for legal ‘relief’, although generally this will only occur once the tenant has righted their wrongs. Note, though, that the landlord’s right to pursue this remedy is restricted when the tenant is insolvent.
Petitioning for bankruptcy or insolvency proceedings
As an unsecured creditor, the landlord has the same rights and remedies as any other creditor and is able to bring insolvency proceedings against a tenant who defaults on rent payment obligations. Again, legal advice is recommended to help consider what the likely outcomes might be before embarking on this course of action. Where a tenant is genuinely insolvent there will be a strict ranking of priorities and secured and preferred creditors will be paid out first.
Safeguards – good to have before things go wrong
Rent Deposit Deeds
Often the landlord and tenant, or their agents, agree that a deposit will be paid at the start of a lease. This should have been formally documented by Rent Deposit Deed (this is a relatively straightforward and cost-effective legal task) which governs how and when the deposit can be used. Where the Landlord holds a deposit, this can be taken against rent arrears in accordance with the terms of the deed. Usually a deposit is limited to 1 or 3 months’ worth of rent, so is quickly used up, but it can buy the landlord time and expose a struggling tenant.
Guarantors
If the landlord has required that the lease includes a guarantor and that guarantor is solvent, the terms of the guarantee in the lease will usually mean that the landlord can demand payment of outstanding rent and also compliance with other obligations, e.g. if the property has not been properly maintained.
Sometimes the guarantee provisions can be used so that where the tenant is insolvent, the landlord can require the guarantor to take a lease of the premises instead. The guarantor then become the landlord’s direct tenant and bears the burden of assigning or subletting the premises, saving the landlord the burden of marketing legwork and professional fees.
Former tenants as guarantors
A slightly more complex legal benefit to a landlord is that a former tenant may be liable to the landlord either under an ‘Authorised Guarantee Agreement’ or, less often now, as a former tenant under a lease which was granted prior to 1 January 1996.
What if the tenant is insolvent?
A landlord’s legal remedies alter significantly once a tenant becomes insolvent. Whether, as a landlord you can pursue the tenant will depend on the type of insolvency contemplated or entered into by the tenant.
Taking legal advice at the earliest opportunity and keeping the channels of communication open during stressful times may significantly improve your chances of recovering money due to you.
Paying for professional advice upfront can help to avoid serious and expensive complications further down the line.
For further information or to get in touch, please contact us on freephone 0800 011 6666 or email legal@timms-law.com alternatively complete the form at the bottom of this page.