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What Are Rent Arrears?

What Are Rent Arrears?
What Are Rent Arrears?

Rent arrears refer to unpaid debts, where a tenant has failed to pay the rent owing for their rented property. This type of arrear is known as priority debt because rental arrears of two months or more can be a legally justifiable reason to evict a tenant in the worst-case scenario and where all other efforts have not resolved the issue.

In commercial property rental, the procedures necessary to recover rent arrears or deal with other tenancy agreement breaches are somewhat different from the residential sector, but options include court proceedings, issuing a statutory demand, or working with a Commercial Rent Arrears Recovery (CRAR) specialist.

Clearway’s commercial property team explains what constitutes rental arrears and what you can do as a business landlord if you find yourself in this position. Disclaimer: The information provided on clearway.co.uk is intended for general informational purposes only and should not be construed as advice or relied upon as a substitute for professional legal counsel on the subject of debt, lease or eviction-related matters. Any reliance you place on the information provided on clearway.co.uk is strictly at your own risk. We shall not be liable for any loss or damage, including without limitation, indirect or consequential loss or damage, arising from the use of, or reliance on, the information presented on this website.

Rent Arrears Explained

As we’ve indicated, a failure to pay the rent owing on a commercial rental property is a rental arrears situation – but there may be scenarios where some landlords will agree to a temporary deferment if they expect the arrears to be a one-off situation and have faith the tenant will bring their account back into good order.

It is also important to clarify exactly what the rent arrears are before you make decisions about how best to respond; for example:

  • Service charge arrears related to service charges payable against the rented property are collected through a separate process called Service Charge Arrears Recovery (SCAR) – you may not be able to collate all debts into one process, depending on what you decide to do.
  • You should ensure you have written documentation that shows the tenant is aware of the rent owing, on which dates and has been notified that they are in rental arrears. If the tenant has any case to argue they were not in arrears or the arrears arose due to a miscommunication, this could cause further delays and complexities.
  • The total owing can influence the next course of action. Statutory demands are formal letters which instruct the commercial tenant to make good on their account within a time limit, normally 21 days. However, this usually only applies where the tenant owes £750 or above, or £5,000 if they are categorised as an individual.

Support from an experienced rental arrears and property dispute agent is often advisable since any legal action, notices issued or formal eviction proceedings should follow the lawful routes and comply with regulations and restrictions.

Commercial Lease Forfeiture

One possible action is to ‘peaceably re-enter’ the premise, but this right depends on the provisions within the lease and whether you have irrefutable evidence that the tenant has breached a lease covenant, whether solely related to rental arrears or involving another breach.

Depending on the commercial lease, you may have the right to re-enter the premise after 14 or 21 days, but in practice, there are caveats, such as re-entering the property when you know it to be empty, attending with a certified bailiff to break locks where necessary, and placing the correct notice on the main entrance.

Forfeiture can be a solution, but there may be other alternatives which are more commercially viable and are allowable within your lease terms.

Commercial Rent Arrears Recovery

CRAR – the process we discussed above – was first introduced in 2014 and is a defined procedure where landlords can collaborate with verified enforcement agents to take action in response to rental arrears.

There are a series of notices that must be issued before CRAR proceeds to the next step, but the end result, if no response is forthcoming, is to recover the tenant’s goods to cover the value of rent arrears.

Note that CRAR follows escalating steps, and a landlord cannot take over control of any goods belonging to a tenant as an immediate response to rental arrears – they must use an appropriately registered and knowledgeable agent to ensure compliance.

It is also important for landlords to assess the pros and cons of each available resolution to ensure they do not sacrifice their right to forfeiture.

Rental Arrears Related to a Sub-Tenant

If you own a commercial premise and allow your tenant to sublet, the situation can become complex if the sub-tenant falls into rent arrears, depending on the agreement they have and with which party.

Generally, as the landlord, you can serve a notice ordering the sub-tenant to pay the rent directly to you, although again, this requires a predetermined procedure, with a notice advising on the value of the rent you have the right to recover according to CRAR regulations.

Deducting Rent Arrears From a Commercial Tenant’s Deposit

In some cases, the fastest and simplest solution may be to deduct the rent arrears from the deposit the tenant paid at the start of the lease. However, there are a few considerations to bear in mind:

  • The tenant must be informed of the draw-down in advance.
  • Deducting value from the deposit does not fully resolve the problem since the tenant would typically be expected to replenish the deposit funds. This action may be less likely if the tenant is already in rent arrears.
  • Maintaining the tenancy with a low deposit may be risky if there is the potential for the tenant to vacate the premises or otherwise breach the lease terms – the landlord will have limited funds to draw on to cover expenses related to repairs.

The norm is for deposit deductions to be used as a short-term, partial measure and to avoid the landlord experiencing financial difficulty rather than a way to repay rent arrears in full.

Issuing a Statutory Demand to Recover Rental Arrears

Finally, you could decide to serve an instruction called a statutory demand, which must comply with several mandatory requirements, and is served to the tenant as a demand for payment.

The limitations explored earlier apply, and the suitability of this option will depend on the value owed and for how long. However, where appropriate, you may have recourse to file an insolvency petition if the tenant fails to act within three weeks of being served.

The commercial debt recovery and eviction specialists at Clearway are on hand if you would like further information about any of the details within this guide or suggestions about the best ways to resolve your rental arrears situation.

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