Commercial Rent Arrears: A Landlord's Guide

This guide provides an overview of the main options available to landlords of commercial premises when their tenants fail to pay rent. 

A landlord's options

Below we provide a brief overview of each of the options identified in the flow diagram.

Rent concessions

A tenant may request a temporary rent concession, for example, a rent holiday, rent deferral or switching from quarterly to monthly rental payments. It may be in the landlord's interests to agree to such a concession but whether that is the case will depend upon the reasons behind the tenant's request. A landlord will want to understand whether the tenant's current inability to pay the rent in accordance with the terms of the lease is down to a short-term cash-flow issue or longer- term problems. In order to obtain the information required, a landlord should ask the tenant for a detailed explanation of why the concession is needed and may ask to see the tenant's financials and/or premises specific trading information.

If the lease is guaranteed, the guarantor should be a party to the concession agreement, otherwise there is a risk the guarantor will be inadvertently released from its obligations under the guarantee.

Statutory demands

A statutory demand requires a tenant to pay the rent arrears within 21 days, failing which the landlord may commence insolvency proceedings against the tenant. For corporate tenants, the value of the arrears must be at least £750 before a statutory demand may be served and for individual tenants, the value of the arrears must be at least £5,000.

A landlord's power to serve a statutory demand derives from section 268 of the Insolvency Act 1986 in respect of individual tenants and sections 123 and 222 of the Insolvency Act 1986 in respect of corporate tenants.  

Rent deposit and bank guarantees

Rent deposit

Where a rent deposit is in place, the landlord will typically hold between six and 12 months' rent in a designated bank account. The circumstances in which the landlord may make deductions from the deposit and the process it must follow will be governed by the rent deposit deed.

The rent deposit deed will usually permit the landlord to deduct rent arrears from the deposit if they are not paid within a specified grace period. The landlord may be required to notify the tenant before withdrawing money from the rent deposit account and will usually have to notify the tenant once the withdrawal has been made. The landlord will usually be able to require the tenant to top-up the rent deposit. 

Bank guarantee

A landlord should check whether it has a bank guarantee in place. This is an arrangement whereby the tenant's bank agrees to pay the rent if the tenant defaults. If there is a bank guarantee, the landlord will be able to recover the arrears in accordance with the terms of the guarantee, which is likely to be limited to a fixed level of arrears and may also have been entered into for a term which is shorter than the term of the lease.

Commercial Rent Arrears Recovery (CRAR)

CRAR allows a landlord to take control of and sell a tenant's goods to the value of the rent arrears. The process a landlord must follow in order to exercise CRAR is set out in the Tribunals, Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013/1894. 

To proceed, the landlord must give the tenant seven clear days' notice of the landlord's intention to exercise CRAR. Once this notice period has expired, a certified enforcement agent may enter the demised premises and take control of the tenant's goods. There are a number of pre-conditions and limitations on the exercise of CRAR. Key points to note include:

• Only principal rent (including VAT and interest) can be recovered (not service charge or insurance rent, even if they are reserved as principal rent in the lease).
• The arrears must amount to at least seven days' net unpaid rent. Interest and VAT are excluded from the calculation of net unpaid rent, notwithstanding that they can be recovered by exercising CRAR.
• Goods belonging to third parties (such as through a hire purchase agreement) must not be seized.
• Items or equipment that the tenant personally needs to carry out its business or trade are exempt from CRAR, up to an aggregate value of £1,350.
• The goods must be sold for the best price that can be reasonably obtained.

Pursue other parties

Guarantors

The tenant's lease covenants may be guaranteed by a surety or guarantor. A landlord can demand payment from a surety or guarantor in accordance with the terms of the guarantee. The terms of the guarantee may also require the guarantor to take a new lease of the premises in the event that the lease is disclaimed or the tenant ceases to have legal existence.

Sub-tenants

If the tenant has sub-let the premises, the landlord can require any sub-tenants to pay rent to the landlord directly until the tenant's rent arrears are paid. This power is conferred on the landlord by section 81 of the Tribunals, Courts and Enforcement Act 2007. In order to exercise this right, the rent arrears must amount to at least seven days' net rent and the landlord must serve notice on the sub-tenants informing them that the tenant has failed to pay rent, and the sub-tenants are required to pay the landlord directly.

Former tenants and guarantors

If the lease has been assigned, it may be possible to require a former tenant or guarantor to pay the current tenant's arrears. The lease:

• must have been granted before 1 January 1996; or
• must have been granted pursuant to an agreement or court order that was made before 1 January 1996.

The landlord must serve a notice on the former tenant or guarantor pursuant to section 17 of the Landlord and Tenant (Covenants) Act 1995 within six months of the arrears falling due. If the former tenant or guarantor makes a payment following service of this notice, they are entitled to call for an overriding lease.

If the lease post-dates 1 January 1996 or was not granted pursuant to an agreement or court order made before 1 January 1996, the former tenant and any guarantor were released from all liability on assignment, unless an Authorised Guarantee Agreement was entered into. If there is an Authorised Guarantee Agreement in place, the former tenant can be required to pay the arrears by serving a section 17 notice as set out above.

Insurers

Landlords should consider whether they benefit from any insurance policies (for example a business interruption policy) which cover loss of rent in the given circumstances.  

Debt claim

A landlord may commence court proceedings in order to recover the rent arrears. This method of recovery is not traditionally a landlord's first choice as the court process can be slow and it may be over a year before the court issues a judgment.  

If the landlord opts to pursue a debt claim, it must comply with the relevant pre-action protocol, which requires the landlord to serve a letter before claim on the tenant. The letter before claim must provide the tenant with enough information to understand the landlord's claim and require payment within a reasonable period of time. The landlord will also be required to consider whether it should attempt to settle the claim via alternative dispute resolution. The most common form of alternative dispute resolution that we encounter in relation to debt claims is mediation. Mediation involves the parties appointing an independent third party (known as a mediator) who will try to assist the parties in reaching a negotiated settlement. 

If the claim is not settled through alternative dispute resolution, the parties will be required to follow the court process. The initial steps include the landlord filing at court and serving on the tenant a Claim Form and Particulars of Claim. These documents will set out the basis of the landlord's claim. The tenant must then respond to the claim, for example, by filing and serving a Defence, which will set out the basis upon which the tenant considers the rent payments are not due. If the tenant fails to respond to the claim, the landlord may be able to bring the proceedings to an end more quickly by applying for a default judgment. Following the initial steps, the court will issue procedural directions which will govern the future conduct of the case.  

Forfeiture

Most commercial leases contain a right for the landlord to forfeit the lease when the tenant fails to pay the rent within a specified grace period (typically 14 or 21 days of the rent falling due). If a landlord successfully forfeits a lease, the lease will come to an end, the tenant will be released from all future liability under the lease, and business rates liability will revert to the landlord. For these reasons, forfeiture is usually a remedy of last resort for landlords, unless they have other reasons for wanting to regain possession of the premises (for example, redevelopment plans or a more reliable tenant in the pipeline). 

A landlord may inadvertently waive it's right to forfeit by acknowledging the ongoing landlord and tenant relationship, for example, by demanding rent following the expiry of the grace period. If a landlord is considering whether to forfeit, it is important to seek advice on how to avoid waiving the right.

There are two ways in which a landlord can forfeit a lease for rent arrears. The first is to issue and serve court proceedings claiming possession of the premises. The second is to take physical possession of the premises by peaceable re-entry. When pursuing the second method, the landlord will invariably change the locks to prevent the tenant from re-entering the premises.

The tenant may apply to court for relief from forfeiture, which the court will almost certainly grant if the tenant pays the arrears, interest on the arrears and the landlord's costs. If the court grants relief from forfeiture, the forfeited lease will (for all intents and purposes) be reinstated.

Conclusion

Landlords have a range of options when tenants fail to pay rent, and the best course of action depends on the specific circumstances, including the reasons for the tenant's payment difficulties. Navigating the statutory and contractual processes can be complex and fraught with potential pitfalls. It is crucial to seek clear advice on the implications of the relevant options and how to effectively implement your chosen strategy.