Solicitors Specialising in Business Tenancy Rent Recovery
As a commercial landlord, you will want to ensure that any commercial property rent arrears are dealt with promptly and effectively. Allowing arrears to accumulate can make it harder to collect them in full. You could also inadvertently lose some rights, such as the right to forfeiture of the lease, should you inadvertently do something during that period that may waive that right.
As a business tenant, you may have various rights relating to rent payments and your lease. If your landlord takes legal action to recover commercial rent arrears, they must use the correct process.
This page explains commercial landlords’ options for recovering rent arrears and the steps they should follow.
Looking for specialist legal advice from Solicitors who really understand Commercial Property Rent Arrears? Call us on FREEPHONE 0800 1404544. Initial legal advice on the phone is always FREE.
What can I do if my commercial tenant doesn’t pay rent ? Your commercial property rent arrears options
The right approach to handling your commercial property rent arrears will depend on your tenant’s legal and financial situation as well as other issues, such as the amount of the arrears and how quickly you want to take enforcement action.
It is a complex area of law and the wide range of options mean that it is best to speak to an expert commercial rent arrears solicitor to ensure you make the right choice.
But don’t delay. Acting promptly as soon as a tenant falls into arrears is also crucial. You must follow the terms of the lease. Whether any part of the property mentioned within the lease is part residential will also impact the procedure you will need to follow.
Payment agreements
A good way to start off is often to discuss a payment arrangement if the tenant is open to this. It’s quite risky to drop your own agreement – especially if the sums owed or the overall rent due is on the high side. That’s why it’s always a good idea to get an experienced commercial property solicitor to draft this kind of agreement to ensure that it is watertight.
The core of the agreement will set out a schedule of payments by instalments, which the tenant must meet to clear the arrears. They will need to pay these alongside the ongoing rent.
This can be the right option if you want to keep the tenant, for example, if you believe it will be challenging to find a new tenant. However, this option may not be right for you in your particular circumstances. In particular, payment agreements should be avoided if you are pursuing forfeiture – as in agreeing to this kind of arrangement, you will likely waive that right to forfeiture entirely.
What are your options for recovering commercial property rent arrears?
If your tenant does not clear the arrears promptly, you can consider legal action.
Your options here are the following:
1. The commercial rent arrears recovery process (CRAR)
2. Obtaining a county court judgment (CCJ) against your business tenant
3. Issuing a statutory demand which can be followed by a winding-up petition or bankruptcy petition
4. Commercial lease forfeiture
5. Recovering the commercial rent arrears from a sub-tenant
6. Recovering the commercial rent arrears from a guarantor
7. Drawing on a commercial rent deposit
1. Commercial rent arrears recovery (CRAR)
If you have a written lease, you can consider using the Commercial Rent Arrears Recovery process – often referred to as CRAR. This avoids the need to go to court.
You can only use CRAR to recover principal rent, VAT and interest due under the lease, not other sums such as service charges, insurance premiums and rates. (section 76(2), Tribunals Courts and Enforcement Act 2007) (“TCEA 2007”)
If the rent includes these costs, then only the part reasonably attributable to possession and use of the property is recoverable.
CRAR is NOT an option for mixed-use premises but only for purely commercial premises. However, a lease will still be within the scope of CRAR if the residential occupation was not permitted and is in breach of the terms of the lease or any superior lease (section 75(5), TCEA 2007).
You should check that your tenant has assets of sufficient value before using this recovery method.
There must be at least seven days of rent arrears to use the CRAR process.
· Enforcement of CRAR
An authorised enforcement agent must deal with the process on your behalf.
The agent will contact the tenant, giving them seven days to respond, known as the notice of enforcement period. After this time has expired, the agent can enter the property and take control of goods. These can ultimately be sold at auction to pay the arrears.
The enforcement agent will give the tenant an inventory of goods seized. The tenant may offer to pay back the arrears in instalments under a controlled goods agreement to avoid seizure and sale. The tenant must ensure that all items remain at the property until they have repaid the arrears. If the tenant defaults on the agreed instalments, the enforcement agent can seize the goods for sale after giving two full days’ notice, which omits the day it was given and the day they attend. So, if the notice is given on Monday, they cannot attend until the Thursday.
The agent must also give the tenant seven days’ notice of the sale of the goods.
Agents are only permitted to seize goods owned by the tenant. This does not include tools of their trade up to the value of £1,350.
Very important that you take specialist legal advice on your commercial lease before starting the CRAR process, as it is a waiver of certain rights, including the right of forfeiture. You also need to make sure that your case fulfils all CRAR requirements. Our team can help you with this.
2. County court judgment (CCJ)
A commercial landlord can ask the court to order the tenant to pay arrears. If the court is satisfied that the tenant owes the debt, it will issue a county court judgment.
A CCJ has a wider scope than the CRAR process. If there is a signed licence rather than a lease, you can still request a judgment. You can also include all sums owed, including service charges and insurance premiums.
Following the correct pre-action protocol in applying to the court is essential. After the tenant has been warned about arrears and sent a payment request, a letter before action must be sent before a claim can be made.
If the tenant still fails to pay, a claim can then be made. Once the landlord has a CCJ, this must be properly served on the tenant, which is usually done by the court, giving them time to pay, which is usually 14 days.
· Enforcement of a CCJ
If the tenant fails to comply with the order, the landlord can take enforcement action. Options include:
· Asking a bailiff to recover the amount owed
· Having the order transferred to the High Court to obtain a Writ of Control, allowing enforcement officers to recover the debt
· Securing a charging order
· Securing a third party debt order
Again, we would strongly recommend that get specialist legal advice before starting off any court action. Why? That’s because there are costs implications to consider and you need to be confident of recovering the debt at the end of the process.
It is also crucial to follow the correct procedure. Getting something wrong when going through the County Court judgement procedure carries a risk – you could be penalised when the court decides who should pay the legal costs of the action.
3. Statutory demand followed by winding up or bankruptcy
A statutory demand can be a quick and often highly effective way of prompting payment. That’s because failure to pay when using this approach, can give you as a creditor the option of issuing a winding-up or bankruptcy petition.
You can use a statutory demand if the arrears exceed £750 in the case of a company or £5,000 in the case of an individual.
Once you have issued the statutory demand, you should give the tenant 21 days to pay. If they do not, the creditor can start legal action to have the company wound up or, in the case of an individual, have them declared bankrupt.
Again, it’s really important that correct process must be followed, including advertising the winding-up petition hearing in the Gazette. This gives other creditors notice of the action. Banks will also note the petition. If the person placing the notice makes errors, the debtor could claim damages, for example, if they lose business or suffer loss because accounts are frozen.
And that’s why it’s so important to have a specialist solicitor deal with the process on your behalf.
If the court is satisfied that a business is insolvent and unable to pay its debts, it can make a winding-up order.
If this happens, the Official Receiver will liquidate the company’s assets and pay the creditors in order of priority.
As the landlord, you may be below priority creditors, such as those with fixed charges. You may not recover all or any of the rent the tenant owes you. The Official Receiver will share the proceeds between those with the same priority. If the Official Receiver treats rent as an administration expense, you may rank before unsecured creditors.
4. Commercial lease forfeiture
A commercial lease agreement will usually contain the right of forfeiture. This is the landlord’s right to re-take the property if the rent is unpaid for a set period.
You must carefully check the lease terms and ensure you stay within this authority.
If a landlord does something which waives their right to forfeit, they will not be able to use this option. For example, if they do not initially forfeit the lease but allow the tenant to continue in the property, the right to forfeit could be lost.
· Enforcement of Forfeiture
Re-entry can be by peaceful means, such as simply repossessing the property while the tenant is absent, usually overnight. You can employ bailiffs to do this. They will change the locks and post a notice on the door advising the tenant of the action.
Alternatively, you can ask the court to make an order requiring the tenant to leave. If there is a dispute as to the amount owed, you will need to use this option to potentially avoid any issues in connection with Section 6 Criminal Law Act 1977, of which is a criminal offence if you fall foul of it.
Again, checking that you have the right legal footing before you start the process of commercial lease forfeiture is essential. Mistakes can be costly.
5. Recover commercial rent arrears from a sub-tenant
If the tenant has sublet the premises to a sub-tenant, as the head landlord, you can require the sub-tenant to pay rent directly to you. This is part of the CRAR regulations. If the sub-tenant fails to pay their rent to you, then you can use the CRAR process against them.
6. Recover commercial rent arrears from a guarantor
If there is a guarantor, you may be able to require them to pay the arrears. It is essential to check the wording of the authorised guarantee agreement and ensure you have the right to do so. You have to stick to the terms of that agreement..
It may be possible to use this approach alongside one of the other options asset out above. So you may be able to require the guarantor to pay the outstanding amount at the same time as taking action against the tenant. Alternatively, the agreement may state that you must pursue the tenant first or wait for a set period before approaching the guarantor.
7. Draw on commercial rent deposit to clear arrears
The rent deposit deed may also allow a commercial landlord to draw on the deposit if any rent arrears exist. You should check the terms of the deed carefully. It might not be possible to do this if the tenant is insolvent, for example. Even if it is an option, with an insolvent tenant, it may be better to allow the administrator to clear rent arrears as an administration expense, if they intend to do this, and use the deposit for any other losses, such as dilapidations.
If a landlord draws on the deposit, the tenant will usually need to top this back up within a specified time frame if they are not insolvent.
Which commercial rent arrears recovery option is best?
Which commercial property rent arrears recovery option is best for you will vary according to your individual circumstances. In particular, when looking at the right option you or your solicitor will need to consider several factors, including:
· The terms of the lease
· Whether the tenant has enough money to pay
· Whether the tenant has enough assets to clear the debt
· Whether the tenant is insolvent or approaching insolvency
· The terms of any other relevant documents, such as a:
o Sub-lease
o Rent deposit deed
o Authorised guarantee agreement
· How quickly you want to deal with the matter
· Whether you want to keep the tenant – or prefer to terminate the commercial lease
· Whether having the premises empty for a period and finding a new tenant is acceptable to you
· Whether you believe that the tenant will pay the rent in the future
CRAR is a popular option. The authorities designed the process to be relatively quick and simple to use, but you need to be sure that the available goods are of sufficient value to make the process worthwhile.
If you are not concerned about having an empty property and needing a new tenant, forfeiting the lease might be the right choice.
Commercial rent recovery arrears is a complex subject. Whichever option you use, it is crucial not to make mistakes, which could mean you lose your rights or end up paying the tenant’s legal costs or even damages.
Taking expert advice from an experienced commercial property disputes solicitor will give you a clear picture and ensure that you choose the right route and give yourself the best chance of recovering the debt.
Help for business tenants facing commercial rent arrears action
As a tenant, your landlord and any other agents dealing with the commercial property rent arrears must observe your rights.
They must follow the correct process throughout, adhering to the terms of the lease and other legal agreements and following the correct pre-action protocols.
If you are struggling to pay your rent and want to assess your options or you believe that the debt is incorrect or your case has not been handled correctly, you should seek legal advice. This is particularly important if the landlord has taken steps that have caused you a loss, such as incorrectly commencing winding-up action.
Further, if the landlord has obtained the premises by forfeiture, you may still be able to seek relief from the court to allow you back into the property. This will usually require payment of the sums that were due in full but you will need to act fast as any delay may be inferred negatively by the court and usually past 6 months would not be permitted.