Commercial landlords can be severely impacted by tenants who continually fail to pay their rent or fall into ongoing arrears. Many landlords rely on their rental income to cover the costs of running or financing rental properties and may need to act quickly if they have a tenant who does not seem willing to make their rental payments on time. So what can you do if your commercial tenant is not paying rent?
There are several ways forward, depending on whether you’d like to address the issue and prevent future non-payment, enforce your lease terms to obligate the tenant to make good on back payments owing or pursue an eviction.
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1. Drawing Down Unpaid Rent From a Tenant’s Deposit
Depending on the lease terms, landlords can, in some cases, deduct unpaid rent from the deposit paid by the tenant at the start of the rental agreement.
If a non-payment is a one-off, and there is no reason to think this will happen again, this may not be the most suitable option since there is the potential to cause friction with the tenant.
However, if you have the ability to take a drawdown from a rental deposit to cover significant or long-standing rental debts, this option could solve the problem immediately.
Tenants who are due to vacate the property and have extensive unpaid rent may also be subject to a reduced deposit returned after their debts have been withdrawn.
Once a commercial tenant has left, it may be much harder to pursue them, and the costs of a court process to chase up unpaid debts can take time and incur legal fees.
2. Setting Up a Payment Agreement With a Commercial Tenant
Another solution, where you’d like to keep your tenant in the property or believe there is a genuine reason they have fallen behind with their rent, is to set up a mutually agreeable payment agreement.
This sort of plan means that the tenant can make contributions towards the unpaid rent in each subsequent payment – for example, paying an extra 10% each month for the next ten months until their rent bill has been cleared.
Note that caution is advisable since entering into a payment agreement may impact your ability to take other action if you decide to evict the tenant or apply for a court order – the agreement indicates that you do not intend to remove the tenant from the property.
Payment plans created with guidance from commercial property professionals often include clauses that give the landlord the power to terminate the lease agreement if the tenant does not make the agreed payments.
3. Solving Commercial Tenant Rent Arrears Through a Guarantor
Although guarantors are more common in residential tenancies, they do exist in business rentals. If the tenant has a guarantor, they are legally obliged to cover the debts of the tenant if they default – this process should be detailed in the lease agreement or guarantor paperwork.
There are also instances where a former tenant has sublet to another business when this is allowed within the rental contract. If they have acted as a guarantor for the new tenant, they may be equally obligated to make good on non-paid rent.
4. Statutory Demands for Insolvent Business Tenants
If a commercial tenant accepts that they are in serious rental arrears but has no way to bring their affairs back in order, the landlord may be able to serve a Statutory Demand, which compels the tenant to make a payment within 21 days.
Ongoing non-payment can lead to a winding-up petition or bankruptcy notice – although this is usually only appropriate in the most severe circumstances and where the business client is very likely to be on the brink of insolvency or has yet to declare this.
Landlords should be aware that if an insolvency practitioner is appointed, this does not guarantee they will receive the rental arrears since these processes can be lengthy and complex, repaying creditors in predefined orders of priority.
5. Recovering Unpaid Debt Through Commercial Rent Arrears Recovery (CRAR)
Commercial Rent Arrears Recovery, or CRAR, is a process that has been available to commercial landlords since 2014 and allows a landlord to appoint a suitably qualified and registered enforcement agent. The agent can seize goods belonging to the tenant and sell them to recoup the outstanding rent.
This process is only applicable to rent arrears, and a different alternative applies where the landlord needs to recover other debts, such as service charges. It is essential you serve the correct notices and work with a professional enforcement agent to ensure your CRAR is both lawful and successful. You can find out more about the process of commercial rent arrears recovery here.
Lease Forfeiture Due to Unpaid Rental Arrears
Lease forfeiture means the landlord repossesses the property and changes the locks, again with assistance from an enforcement agent in most cases. They must display a notice prominently on the property advising that they have forfeited the lease and why. Various rules exist, such as never attempting to enter the building when the tenant is present.
Forfeiture proceedings can be the best option where a commercial tenant has a long history of non-payment and the landlord does not believe they have any intention of repaying the debt.
This type of eviction must be allowed within the lease terms to be valid, and tenants have the right to apply for relief from forfeiture through the court – which will only be granted if they pay all outstanding debts and the legal costs of the landlord.
Evicting a Commercial Tenant Due to Non-Payment
Finally, landlords can apply for a court order to recover their arrears owing and remove the tenant. You will need sufficient evidence of non-payment and proof of all correspondence with the tenant to support your case and show that you have made reasonable efforts to solve the issue before pursuing a court-ordered payment or eviction.
Most landlords find that a Statutory Demand or other form of notice before action is an effective, straightforward and easy way to recover outstanding rent. Once all other avenues have been exhausted or found to be inappropriate, a court order may be the final resolution available.
For more information about any of these options or tailored guidance about the best way to deal with a commercial tenant who isn’t paying their rent, please contact the Clearway team on 0800 002 9049.