Tips for Landlords five signs your tenant may be in financial distress
06 January 2023
As the Office for Budget Responsibility has forecast that the UK economy will be in recession until Q3 2023 and we are receiving an increasing number of queries from landlords concerning tenants entering into administration, we set out below some warning signs which may give landlords an early indication that their tenants are in financial difficulty.
- Persistent late payment of rent or a build up of arrears.
The restrictions preventing landlords from recovering Covid-related arrears from their tenants were finally lifted at the end of September 2022. A number of landlords have used this milestone as an opportunity to review their arrears positions and work with us in order to devise strategies for arrears recovery or to terminate relationships with tenants who have failed to pay following the Covid lockdown periods. As the UK economy enters recession, keeping a keen eye on arrears positions will be key. - Requests for rent concession agreements.
At the height of the pandemic we saw a large number of tenants requesting rent reductions, rent free periods or to pay rent monthly rather than quarterly. In some circumstances, we saw tenants quickly fall foul of concession agreements. If a landlord is willing to grant a concession, they would be well advised to monitor their tenant's adherence to the terms of the agreement and take action as necessary, and to monitor the expiry of those arrangements to maximise rental income. - Payment of rent by a third party.
If a landlord starts to receive rent payments from a third party, rather than their tenant, they should investigate why this is. It is possible that the tenant has cash flow problems and a group company is paying the rent instead. However, it may be an indication that the tenant has allowed a third party into occupation of the premises without permission. Landlords will want to avoid inadvertently entering into a landlord/tenant relationship with an unknown third party and there are steps landlords can take to ensure that this does not happen. A starting point would be to carry out a site inspection to determine who is in occupation. - Requests that the landlord draws down from the rent deposit to meet rent payments.
The value of a rent deposit will usually be equivalent to six months to one year's rent. A request that the landlord uses up the deposit is a clear indication that the tenant expects to have medium to long term cash flow issues. - Companies House notice of compulsory strike off.
If the tenant entity is a company registered in the England & Wales, it will be obliged to file financial statements with Companies House each year. When finalising those statements, the directors of the tenant company are obliged to consider whether the company can continue to trade as a going concern. A company's financial statements may be overdue for a number of reasons, however, if they are so late that the Registrar of Companies House issues a notice for compulsory strike, this may indicate that the directors do not believe that the company can continue to trade as a going concern. Landlords will want to prevent the tenant company from being struck off as, otherwise, an application would need to be made to court to restore the tenant to the register before the landlord can seek to recover any arrears. Landlords can use the "follow" function on the Companies House website to ensure they are updated when documents are filed on the register relating to their tenants.
If you are concerned that your tenant may be in financial difficulty and require advice on your options, the Ashurst team has a wealth of experience in this area, including: serving statutory demands requiring payment of the arrears; Commercial Rent Arrears Recovery; commencing court proceedings for recovery of arrears; negotiating rent concession agreements; requiring sub-tenants to pay rent directly to their landlord; drawing down on rent deposits; liaising with insolvency practitioners if your tenant does go into administration or liquidation; forfeiture and more.
