There are few things more unsettling for a commercial landlord than a tenant who stops paying the rent. As well as causing financial uncertainty, non-payment of rent can often leave commercial landlords unsure of how to resolve the issue.
In recent years the Covid-19 pandemic has exacerbated the problem, with an increasing number of tenants – especially those in retail or hospitality – struggling to keep up with rental payments in the face of government-mandated temporary closures.
In this guide, we explore the options available to commercial landlords, from recovery or restructure of rent arrears, to evicting the tenant for non-payment.
- Why are your commercial tenants not paying rent?
- The impact of Covid-19 on rent arrears
- Things to consider when your tenant stops paying rent
- How to evict a commercial tenant for non-payment of rent
- Recovery of rent and rent arrears
- The importance of legal expenses insurance
The first thing to establish is why your tenants are not paying their rent.
Are they suffering financial difficulties, is it a short-term cash flow problem, or have they stopped paying their rent for another reason? For example, do they feel that you are not fulfilling your commercial landlord legal obligations?
It’s best to find out the circumstances surrounding non-payment of rent before rushing to take recovery action against the tenant, it may help you to resolve a dispute early on without incurring costly legal fees.
The Covid-19 pandemic saw an increasing number of commercial tenants struggling to pay their rent, with arrears estimated to be at £9bn by March 2022. This mainly related to businesses in retail and hospitality like pubs, restaurants, cafes, and shops that were subject to mandatory government closures to reduce transmission of Covid-19 during the pandemic.
To help struggling commercial tenants, the government announced a temporary freeze on commercial evictions until 24th March 2022, which introduced a legally binding arbitration process for eligible commercial landlords and tenants who had not already reached an agreement on pandemic-related rent debts. Firms who had applied through the arbitration process were protected until the 24th September 2022.
From the 24th March 2022, the Commercial Rent (Coronavirus) Act 2022 came into force, which applied to any business adversely affected by mandatory closure orders during the pandemic in England and Wales. It sits alongside a new commercial rent code of practice.
Covid-19 regulations notwithstanding, you have several options as a commercial landlord if your tenant is in rent arrears – but there are a few things to consider before deciding to take action.
- How many payments has the tenant missed? Were they previously a reliable payer that has run into short-term difficulties?
- Has the tenant broken any other terms of their lease?
- Would it be better to keep the tenant, or repossess the property and try to find a new tenant? How long would that take?
- How financially secure is the tenant?
- Are there any guarantors that could settle outstanding rent?
Once you know the answers to these questions, you will be in a better position to judge if you should go down the route of evicting your tenant and regaining possession of your property.
In some circumstances, it may be better to agree to a temporary reduction in rent, a rent holiday, or a restructuring of payments. Helping your tenant survive temporary financial issues may mean a return to a stable rental income sooner than if you had to try to find a new tenant in difficult post-pandemic trading conditions.
If your property becomes vacant, there are security considerations and you would need to take out unoccupied commercial property insurance.
If you do come to an agreement with your tenant over the payment of future, and missed, rent you must document this in the lease agreement to avoid legal issues further down the line.
If you have decided that removing your tenant for non-payment of rent is the best option, you are legally entitled to forfeit the lease and regain possession of your property – as long as there is a forfeiture clause in the lease.
This course of action may be attractive if your tenant has a history of rental default, or you don’t believe there is a realistic chance they will fulfil their future rental obligations. If the rental market in your sector is strong you may be able to secure a new tenant quickly, and possibly at a higher rent than before.
How to forfeit the lease
A ‘forfeiture of lease’ clause must be included in the commercial lease agreement for a landlord to be able to ‘peaceably re-enter’ a property in the event of non-payment of rent.
Make sure you do not waive your right to forfeiture by, for example, continuing to demand rent or accepting even part-payment during the forfeiture process.
There are two methods of regaining possession of your property.
- Peaceable re-entry: after a period of notice you can instruct a certified bailiff to enter the premises, without recourse to the courts, by breaking and changing the locks while the property is empty, barring the tenant from re-entry. The tenant can apply to a court for relief from forfeiture to have the lease reinstated, but to have any chance of success they will have to pay all outstanding rent and the landlord’s costs associated with the forfeiture. It’s also unlikely that their appeal will be successful if the landlord has found a new tenant.
- Eviction by court order: you can apply to your local county court for a possession order, which can take much longer. Once your solicitor has issued proceedings, the court will set a date for a hearing, at which point the tenant has 14 days to either file a defence or to apply for relief from forfeiture. The court will then rule on whether possession can be granted.
Eviction at the end of the lease
If your tenant has come to the end of their lease, you can only evict them under certain circumstances:
- if they have not paid their rent or have breached other terms of the lease;
- if you have excluded the provisions of the Landlord and Tenant Act 1954 which otherwise provides the tenant with security of tenure (an automatic right to renew the lease). Exclusion of security of tenure must be agreed with the tenant at the start of the tenancy.
There are several options landlords can take to recover commercial rent arrears, but you need to be aware of the provisions of the Coronavirus Bill, which relates to arrears built up when some businesses were forced to close during lockdowns in England and Wales.
Commercial Rent Arrears Recovery (CRAR)
The CRAR allows a commercial landlord to instruct a certified enforcement agent to take control of the tenant’s goods and sell them to recover unpaid rent, without needing to go to court. An enforcement notice must be served to the tenant seven days prior to action being taken, after which time enforcement agents can enter the property through an unlocked or open door.
Commercial landlords can use the CRAR process if the property is purely commercial and not mixed with residential, there is a written lease in force, and the rent is more than seven days overdue.
CRAR can only be used to collect ‘pure rent’ that is overdue – not service charges, insurance rent, or other charges due under the lease.
Rent deposit drawdown
You may be able to draw down on the tenant’s rent deposit to cover unpaid rent, depending on the terms of any Rent Deposit Deed.
Drawing on the rent deposit, which will not waive any future rights to forfeit the lease, may be useful if non-payment of rent is an isolated incident and if the Deed requires the tenant to top up the deposit.
Pursuing guarantors, former tenants, or sub-tenants
There may be a provision in the lease that obliges a guarantor to pay any sums due if a tenant does not pay the rent. Similarly, you may be able to recover rent arrears from ex tenants if they have guaranteed the obligations of the current tenant by assigning the tenancy.
Finally, you may be able to recover unpaid rent from a sub-tenant (the tenant of your tenant) in some circumstances, subject to the terms set out in the Landlord and Tenant (Covenants) Act 1995.
Issuing proceedings to recover debt
You may decide to instigate court proceedings to recover the rent arrears and any other sums due, but this is likely to take some time.
Going down this route is of little use if the tenant cannot afford to pay the rent, and the debt will merely increase if the tenant remains at the property, not paying rent, during the wait for a court hearing.
Statutory demand / winding-up petitions
A statutory demand is a written demand for the payment of a debt and can be used by landlords as a quick and relatively inexpensive way to take action to recover unpaid rent.
They are often issued as a warning to pay sums due before further legal action is taken, such a winding up order.
If the tenant has not paid the debt within 21 days, landlords may be entitled to present a winding up petition to the court, with the unpaid debt used as proof of the company’s insolvency.
It’s worth noting that the Corporate Insolvency and Governance Act 2020 prevents creditors from taking any enforcement action for an initial period of 20 business days, to give companies “breathing space” to pursue a rescue or restructuring plan.
The cost of recovering unpaid rent arrears can escalate, especially where there are disputes with your tenant over the debt or the terms of the lease that result in protracted court proceedings.
That’s why it’s important to have commercial legal expenses insurance, usually available as an optional extra to your commercial property insurance. It is important to note, though, that not all commercial legal expenses policies will cover the cost of recovering outstanding rent. Before taking out a policy it is best to check the policy wording to confirm if this is covered.
Commercial legal expenses insurance provides cover to defend your legal rights in a dispute with your tenant over maintenance of your property, repossessing your property, and recovering outstanding rent due to you.
For a legal expenses claim to be successful, it’s important to inform your insurer immediately before any action is taken, and follow the advice of the insurer’s legal helplines. Insurers will often wish to appoint their own panel solicitors to act on the client’s behalf.
Alan Boswell Group has a wealth of advice and specialist insurance policies for commercial landlords. Check out our commercial landlord hub for articles and details of cover.
Legislation and guidance included in this article is correct as of December 2022. Please note that legislation does change, it is always best to check the most up to date guidance on gov.uk and seek legal advice before taking action.