Pay day

In the current economic climate many landlords of commercial property are faced with tenants who are unable to pay their outgoings. This can include rent, service charges and other payments under the lease. It is not just the individual tenant of a local shop, but also national high street chains who are all struggling to pay rent and other outgoings due to poor trading conditions in the current market.

Many well known household names in the retail industry alone have gone or are having to consider going into administration, and with every quarter date that approaches, further concern emerges for the landlord as to whether there rental income will be received and brings further worry for the tenant who is faced with no cash or not enough cash to pay all outgoings in full.

Landlords are continuing to face the real problem of rent arrears, which once they start to accumulate are difficult to gain payment and recover. Insolvencies and bankruptcies are still on the increase and there are some very tough decisions for the landlord to make when considering the recovery of overdue rents.

Landlords do have a number of options to consider when rent is not paid and should always seek legal advice while doing so.

Negotiate
A landlord may be asked for rent to be paid monthly rather than quarterly to help a tenant’s cash flow and/or for rent arrears to be paid over an agreed period of time. Rent holidays may be agreed in certain circumstances. These options may help a tenant to trade and prevent further rent arrears accruing for the landlord. It is hugely important that negotiations should be undertaken to try and agree a satisfactory outcome for all  parties concerned.

Rent deposit
A landlord may have the benefit of a rent deposit where funds can be drawn down to settle the arrears. This may be helpful in the short term but will not help long term where usually the tenant under the rent deposit is still liable to top the rent deposit back up to the original deposit amount (i.e. three or six months rent) and will still be liable to continue to pay the lease rent. It would be preferable to keep the rent deposit and pursue other options before heading down this route.

Guarantors and previous tenants
A landlord should check whether the tenant has any guarantors available under the lease. Guarantors are liable for ensuring the performance of the tenant’s covenants under the lease including the payment of rent where the tenant is in default.

There may also be a previous tenant of the premises who is still liable to guarantee the performance of the current tenant under an Authorised Guarantee Agreement that may have been entered into as a condition of the lease being assigned the current tenant.

If the lease was granted prior to 1st January 1996, the original tenant under the lease and any subsequent tenants who provided a direct covenant to the landlord under any Licence to Assign and any respective guarantors will remain liable for rent.

Any former tenants or their guarantors must be served with a section 17 notice within six months of the date the rent demanded was due. Failure to serve the notice correctly within the six months timeframe will result in the landlord not being able to claim for that particular sum. If the person served with a section 17 notice so requires, the Landlord can grant an overriding lease to that person for example a guarantor who will then take control of the premises but also be liable for payment of the lease rents.

Any previous tenants and guarantors should be pursued at the same time as the current tenant who has built up the rent arrears where there is a risk of insolvency.

Statutory demand
A tenant may be served with a Statutory Demand if the arrears are £750 or more. If payment is not made within 21 days, action can be taken by the landlord to make the tenant pay the owed sum. Or, serve a winding up petition when the tenant is a company. However, this is unlikely to assist the landlord and courts are usually reluctant to the winding up process simply for debt recovery.

Forfeiture
Most leases will give the landlord the right to end any lease and recover possession if there is a breach of any covenant under the lease including where rent arrears accrue for a set period of days. Also, if the tenant as an individual is made bankrupt or a tenant company has a receiver appointed or goes into liquidation. Forfeiture can take place by the landlord peaceably by entering the premises or by court proceedings.

Re-entry
If the let premises are not occupied, the landlord can consider re-entering with a view to reletting. Action can still be taken to pursue the tenant for a debt action for the rent arrears. The landlord will not always wish to re enter as he may not be able to find another tenant soon enough, and will be responsible for the outgoings of the premises while it is vacant.

Section 6 Notice
Under the Law Of Distress (Amendment) Act 1908 a Head Landlord can serve a Section 6 Notice on any sub tenant that may be in occupation to pay to the Head Landlord direct any rent due under the sub lease rather than to the immediate Landlord who may be in arrears. This can be effective and simple to achieve where there are sub leases in place.

Court proceedings
A landlord may commence court proceedings against a tenant and can seek a summary judgment where there is no defence to the claim. The judgment can then be enforced against any of the tenant’s assets through court enforcement procedures. Court action can however be expensive and time consuming for the landlord.

As one can see from the various options above; there is much for any landlord and tenant to consider. Seeking professional advice at an early stage when the first signs of difficulty rears its head can help alleviate a problem, which may otherwise escalate uncontrollably whereby both parties will suffer.