In the current economic climate many commercial property landlords will be exposed to an increase in the number of tenants who are in arrears or unable to pay their rent. The non-payment of rent normally presents a landlord with a long-term problem as once arrears start to accumulate it can become more difficult to obtain payment.
Depending on the situation there are various options available for landlords to gain payment or to mitigate the situation.
Forfeiture is the termination of a lease by the landlord prior to expiry of the agreed term on the grounds that the tenant has breached the term of the lease usually because of rent arrears. Most commercial property leases specify that forfeiture can be obtained if the rent falls into arrears for more than a specific period, normally 21 days. To forfeit the lease a landlord can either retake the premises by peaceful means or, in some cases, court action may be taken. In both cases a default notice has to be served in respect to the breach. If the defaulting tenant is in administration the consent of both the court and the administrator is required before the lease can be forfeited.
This is an attractive option where the tenant is insolvent or in a buoyant market where rent is rising and there is a supply of potential new tenants for the landlord to re-rent the property to. In the current market this option may not be as attractive, as once a landlord begins to forfeit the lease it is essentially the start of the end and all future liability under the lease will terminate. Furthermore finding another tenant may not be easy and a landlord must consider that often business rates are payable on vacant premises. Also tenants can apply to the court and often obtain relief from the forfeiture, particularly if they can pay the arrears or if the arrears are small.
This is the seizure of goods of sufficient value to secure payment of overdue rent. A landlord is entitled to enter the tenant’s premises to seize the goods and if the rent remains unpaid they have the right to sell the goods. This option will almost certainly destroy any constructive relationship and the seizure of goods often removes the tenant’s only means to earn money and subsequently pay the rent. There are complex rules which limit what items can be seized and when. There are also certain restrictions where a tenant is insolvent and the form of insolvency will dictate if distress can be applied and if consent of the court and the administrator is required.
This process is advantageous if tenant has gone into liquidation or become bankrupt and the landlord wants to keep the lease in place because there are subleases involved, or if there is a former tenant or guarantor who remains liable. However, only a liquidator or trustee in bankruptcy can disclaim a lease as it effectively brings it to a finish and ends the liability of the current tenant.
Although landlords do not need a court order for the options discussed above, going to court is an available option if there is likely to be a dispute about whether the tenant is in breach of the obligations under the lease.
If the landlord believes the tenant can pay then it can treat the lease as continuing and sue for the rent as it falls due.
Depending on the relationship that a landlord has with a tenant, a landlord could consider coming to an informal arrangement including granting a rent concession, or negotiating a lesser rent for a defined period or offering alternative premises.
If sub-tenants are involved then the landlord could consider serving notice on them ordering them to pay the rent direct to the landlord.
In the current economic climate it its worth landlords considering alternatives rather than being face with the challenge of re-renting.
A landlord should always implement due diligence on the tenant before granting a lease or a consent to assign. Finding out as much as possible about the tenant’s financial circumstances can also help if in the future enforcement action is required.
It is also good practice to negotiate a lease with sources of security including guarantors, rent deposits, sub-tenants and authorised guarantee arrangements from the previous tenant.
With recent law changes making it harder for landlords to seize goods and ‘debtor-friendly’ insolvency procedures it is now more important then ever for landlords to be more sophisticated in their lease negotiations and to take legal advice from a commercial property solicitor.