Commercial rent arrears

6th November 2014

First published in RICS Property Journal.  Answers provided by Jeremy Ferris, Property Disputes Expert.

QUESTION

My commercial tenant is in arrears of rent amounting in total to £40,000, which is one year of rent. I have just been sent a cheque of £2,500 which the tenant tells me is all it can afford at this time. Should I accept the payment and what other remedies do I have?

ANSWER

There is a concern that in accepting the lesser payment you will waive your right to forfeit the lease. The right to forfeit is your right to re-enter the premises and end the lease on a breach by the tenant of its covenants. The right is not automatic and exists only where the lease expressly includes it, although almost all commercial leases do, usually expressed to include the right to forfeit for any breach, including non-payment of rent.

In a depressed property market, faced with a consistent bad payer but no alternative tenant, you may be tempted to take whatever payment you can to reduce the ever accumulating rent arrears. However, if you accept the payment you will potentially lose the chance to forfeit the lease for that breach. You will therefore miss the opportunity to evict the tenant until the next rental default and potentially lose the chance to let the property to a new tenant.

One way around this is to apportion the payment to the ‘oldest’ arrears. If that is done then there will have been no waiver of the right to forfeit. There will still be a breach of the covenant to pay rent as the latest quarterly payment remains outstanding.

Two further points of caution are that rent accepted by your agent after a right to forfeit has arisen will waive that right (even if you have told the agent not to accept such rent) and rent paid by cheque after a right to forfeit has arisen that is not presented for payment may not lead to waiver. The cheque should, however, be sent back to the tenant.

Apart from forfeiture of the lease, or of course commencing Court proceedings for the arrears there are a number of remedies available in such a situation.

Levying distress

Until 6 April this year, the remedy of Distraint for rent had for hundreds of years enabled a landlord to enter tenanted premises without notice in order to seize a tenant’s goods. The landlord could then sell those items and take the proceeds as payment for arrears of rent.

That ancient right was, however, brought to an abrupt end by a new statutory procedure of Commercial Rent Arrears Recovery (CRAR). This introduces a number of fundamental changes including:

  • a requirement that there be unpaid rent equal to at least seven days (there was no minimum amount for distress).
  • a requirement that the landlord must give seven clear days’ notice in writing before entering the premises to seize goods (there was no requirement of notice under distress).
  • a landlord can only exercise CRAR in respect of rent arrears (plus VAT and accrued interest). It is not available for service charge arrears, insurance charges or rates, even if these sums are reserved as ‘rent’ in the lease.

Pursuing a sub-tenant

Under the Law of Distress Amended Act 1908 you can demand that any sub-tenant make all future payments of rent directly to you until the tenant’s arrears are discharged. Formal notice in the prescribed form must be served on the sub-tenant.

Pursuing a guarantor or former tenant

If there is a guarantor/former tenant, it is possible to claim against them or, if the lease was granted before 1 January 1996, claim the rent against the original tenant. In either case, a notice must be served on the guarantor or former tenant within six months of the current tenant's default. If a notice is served after that date you will only be entitled to claim for the previous six months’ arrears.

Bankruptcy or winding up proceedings

Another option is to commence bankruptcy, or winding up proceedings against the tenant. Careful consideration needs to be given to this process because although the mere service of a Statutory Demand may be enough to persuade the tenant to settle the arrears, the process towards a court hearing is expensive and if the tenant genuinely has no money then there will be little reward.

Alternatives

In the current case, the arrears are at such a level that the prospects for alternative ‘amicable’ means of settlement are limited. Nevertheless you may consider other options with the tenant such as payment of the arrears by ongoing monthly payments. You might also consider entering into a side letter to allow the tenant to pay rent monthly for a limited period. In doing so, however, you would automatically be waiving a right to forfeit for non-payment of rent and would be back to square one.

 

 

< Back to Press Releases

How can we help you

Call us on

0333 331 9877

Email your enquiryEmail your enquiry