What to Do If Your Commercial Tenant Is Not Paying Rent

When a commercial tenant fails to pay rent and other sums due under a lease, there are several remedies a landlord can pursue to remedy the breach and recover payment. These include:

• Forfeiture
• Drawing down on a deposit
• Pursuing a guarantor or former tenant
• Court proceedings to recover debt
• Commercial Rent Arrears Recovery (CRAR)
• Statutory demand and Insolvency proceedings
• Payment agreement

General Points for Commercial Landlords to Consider

Commercial landlord and tenant law can be complex, particularly when disputes arise. It’s crucial to consider all available options and your ultimate aim. The following points should be considered when a commercial tenant is not paying rent:

• Are there any other breaches of the lease that require remedy?
• Is this a one-off incident, or are there persistent delays in paying rent?
• Do you want the property back, or do you want to maintain the landlord-tenant relationship?
• How solvent is the tenant generally, and will the chosen remedy push the tenant into insolvency?
• How cost-effective is each remedy, balanced against how long it will take to get payment of the arrears?
• Is there a third party who could be required to pay the arrears?

Should I Forfeit the Lease?

Most modern commercial leases contain a forfeiture clause that allows the landlord to terminate the lease or peaceably re-enter if the tenant breaches any obligations under the lease, or on the occurrence of certain events specified in the lease, such as non-payment of rent.

Considerations:

• Do you want the property back? If the rental market is strong, the landlord may be confident that it will be able to quickly secure a new tenant at a higher rent. In that instance, forfeiture may be an attractive option for a commercial landlord. However, if the property is likely to be vacant for some time, or the market no longer supports similar letting terms, the landlord may want to keep the existing tenancy in place and instead pursue alternative remedies and secure the future performance of the tenant’s covenants.
• You should also consider the possibility that a tenant can obtain relief from forfeiture for non-payment of rent. It is likely that a tenant will obtain relief from forfeiture if it pays all arrears, interest and costs.
• When dealing with a commercial lease, and numerous breaches, a landlord may forfeit the lease for the non-payment of rent alone. No section 146 notice is required for this, unlike certain other breaches of a lease. If, however, the tenant were to obtain relief from forfeiture, the landlord could find itself having to allow the tenant back into occupation without any resolution of the other breaches. 
• If you forfeit the lease, it is also worth having a plan as to how you will recover the debt if the tenant does not apply for relief from forfeiture.

Have I Waived the Right to Forfeit the Lease?

If the right to forfeit has arisen and the landlord is considering re-entry, care must be taken to ensure that nothing is done to waive that right. 

Waiver of the right to forfeit will occur where the landlord, with knowledge of the tenant’s breach, performs an unequivocal act that recognises the lease as continuing to exist and communicates that act to the tenant. You should seek legal advice as soon as your tenant stops paying rent, to ensure you take the best approach for you. Non-payment of rent is a “once and for all” breach, which means that if the landlord waives the right to forfeit in respect of a rent payment, it cannot forfeit the lease for that breach. However, the landlord might be able to forfeit at a later date, should the tenant breach the lease again. 

Sometimes the best approach for a landlord that wishes to protect its right to forfeit may be to cease all communications with the tenant to avoid any argument that the right to forfeit has been waived.  

Can I Draw Down on the Rent Deposit?

A commercial landlord may be able to draw down from a rent deposit to recover rent arrears or other sums due under the lease. This is a secure source of funds, and the timing of any draw down should be considered carefully.

Considerations:

• If the tenant’s long-term solvency is uncertain, and there are other methods to recover the debt, the landlord might want to utilise them and maintain the rent deposit for any future arrears. 
• On the other hand, if the arrears of rent are an isolated incident, and the tenant is able to top up the rent deposit, this is a quick and simple method of recovering the debt, which allows the landlord and tenant relationship to continue. 
• Be mindful that a draw down on the rent deposit could waive the right to forfeit. The wording of the rent deposit deed should be considered and, if allowed, the landlord may first forfeit the lease and then draw down the rent deposit if the landlord wants to take the property back.

Can I Pursue a Guarantor or Former Tenant?

The landlord may be able to recover rent arrears and other sums due under the lease from any guarantors or former tenants under the lease by way of a contractual guarantee or privity of contract rules.

If you have a tenant who is not an original tenant under a lease this is something you should be considering now.

Not all tenants (or their guarantors) who have assigned a lease will still be liable for rent, and other obligations under the lease. It will depend whether the lease is an ‘old lease’ or ‘new lease’ that is granted on or after 1 January 1996, and whether an Authorised Guarantee agreement was entered into if it was a new lease. The first step is to investigate who, as well as your current tenant and their guarantor (if any), may still be liable.

In order to recover the unpaid sum for a former tenant (or former guarantor) who has a liability, a landlord must first serve a notice on them under Section 17 of the Landlord and Tenant (Covenants) Act 1995 (LTCA), within 6 months of the debt falling due. This is a relatively short deadline for landlords.

All monies due under the lease are covered by this procedure. 

If a landlord fails to serve the Section 17 Notice on the former tenant (or former guarantor) within the 6-month period, the former tenant (or former guarantor) is no longer liable for the debt.

If a party receives a Section 17 notice and then makes payment in full, it has a right under section 19 of LTCA call for an ‘overriding lease’ – in effect becoming the landlord’s direct tenant.

Therefore, landlords should only consider serving a Section 17 notice on a party whom the landlord is happy to have as a potential tenant. It would be advisable for the landlord to consider the covenant strength of all parties before serving a Section 17 Notice.

Should I Commence Court Proceedings to Recover Debt?

A landlord can issue court proceedings against the tenant to recover rent or other sums due under the lease.

Considerations:

• In some instances, the tenant will have no defence, and summary judgment could potentially be obtained and the usual means of enforcing a judgment debt are then available, such as sending in bailiffs or attachment of earnings or insolvency proceedings. This may be useful if you wish to put pressure on the tenant to pay without losing the tenant.
• In other instances, such as where tenants defend the claim, court proceedings can be protracted. A court hearing may not be set for several months, and the tenant may not feel any impetus to pay the arrears in this period.
• If the landlord wants to give the tenant time to get its financial affairs in order and pay the arrears, preserving the landlord and tenant relationship, court proceedings may be the most appropriate way of taking action to obtain the unpaid rent.

Commercial Rent Arrears Recovery (CRAR)

Commercial rent arrears recovery (CRAR) is a method of enforcement for recovering rent arrears relating to commercial property which allows an enforcement agent to take control of a tenant’s goods and sell them to recover arrears. This method, effective from 6 April 2014, abolished the common law right to distress.

Where a landlord has the right to recover rent from its tenant under CRAR, the landlord also has a right to recover rent from an undertenant.

Considerations:

• CRAR is only exercisable against arrears of principal rent. If any of the arrears relate to service charges, insurance rent, or other sums due under the lease, CRAR cannot be used to recover them.
• In order to use CRAR, a landlord must provide 7 days’ notice of enforcement. Once this period expires, Certificated Enforcement Agents may enter the property (through an open or unlocked door) to seize goods.

Should I Serve a Statutory Demand or Start Insolvency Proceedings Against the Tenant?

Where the tenant has failed to pay rent or other sums due under the lease, the landlord may wish to consider commencing insolvency proceedings. Where there is no dispute as to the amount of the debt, the landlord could consider serving a statutory demand on the tenant. If this remains unpaid after 21 days, and it is £5,000 or more in relation to a tenant who is an individual (more than £750 for corporate tenants), then this may be deemed evidence of inability to pay a debt and therefore gives grounds to present a bankruptcy or winding up petition. 

Often, simply threatening insolvency proceedings can encourage the tenant to prioritise the rent arrears and pay quickly. However, if there is any dispute as to the debt, the tenant could apply to set aside the statutory demand and if the tenant is successful in such an application, then the landlord could end up being liable for significant costs.

Should I Enter into a Payment Agreement with the Tenant?

A payment agreement requiring the tenant to pay arrears in instalments might be considered, depending on the circumstances.

Considerations:

• The payment agreement must be carefully drafted. The landlord should ensure that there is a clear distinction between payment of arrears under the payment agreement and continued payment of the rent under the lease. The payment agreement should contain termination provisions and a full payment of any outstanding arrears if either party disposes of its interest in the lease: or there is any default by the tenant in meeting the payment agreement deadlines. 
• The landlord ought to consider connecting the payment agreement to the lease so that default under the agreement will give the landlord a further right to forfeit the lease. 
• Entering into a payment plan will preserve the landlord and tenant relationship and provide some time for the tenant to resolve any financial issues and if successful, it will achieve full repayment of the arrears.
• If the tenant is generally solvent and the arrears were an isolated incident, this may be a sensible way to proceed. However, it could also delay the inevitable of pursuing other methods of recovering the money and, if not correctly drafted, compromise the right to pursue these arrears.

If Your Commercial Tenant is Not Paying Rent – Contact Us: Commercial Property Litigation Solicitors

For inquiries on this topic, please contact David Burns, RFB’s Senior Litigation Partner, at D.Burns@rfblegal.co.uk or by phone at 07762318409.