Is Your Tenant Unable to Pay Rent?

Thu 28th Oct 2010

Landlords are continuing to face the real problem of rent arrears which once they start to accumulate are difficult to gain payment and recover.

Insolvencies and Bankruptcies are still on the increase and there are very tough decisions for the Landlord to make when considering the recovery of overdue rents.

Landlords do have a number of options to consider when rent is not paid and should seek legal advice whilst doing so.

Negotiate

A Landlord may be asked for rent to be paid monthly rather than quarterly to help a Tenant’s cash flow and/or for rent arrears to be paid over an agreed period of time. Rent holidays may be agreed in certain circumstances. These options may help a Tenant to trade and prevent further rent arrears accruing for the Landlord. It is important that negotiations should be undertaken to try and agree a satisfactory outcome for both parties.

Rent Deposit

A Landlord may have the benefit of a Rent Deposit where funds can be drawn down to settle the arrears. This may be helpful in the short term but will not help long term where usually the Tenant under the Rent Deposit is still liable to top the Rent Deposit back up to the original deposit amount i.e. 3 or 6 months rent and will still be liable to continue to pay the Lease Rent. It would be preferable to keep the Rent Deposit and pursue other options first.

Guarantors and Previous Tenants

A Landlord should check whether the Tenant has any Guarantor available under the Lease. Guarantors are liable for guaranteeing the performance of the Tenant’s covenants under the Lease including the payment of Rent where the Tenant is in default.

There may also be a previous tenant of the premises who is still liable to guarantee the performance of the current Tenant under an Authorised Guarantee Agreement which may have been entered into as a condition of the Lease being assigned the current Tenant.

If the Lease was granted prior to the 1st January 1996 the original Tenant under the Lease and any subsequent Tenants who provided a direct covenant to the Landlord under any Licence to Assign and any respective guarantors will remain liable for rent.

Any former Tenants or their guarantors must be served with a section 17 notice within 6 months of the date the rent demanded was due. Failure to serve the notice correctly within the 6 months timeframe will result in the Landlord not being able to claim for that particular sum. If the person served with a section 17 notice so requires the Landlord can grant an overriding lease to that person for example a guarantor who will then take control of the premises but also be liable for payment of the Lease Rents.

Any previous tenants and guarantors should be pursued at the same time as the current Tenant who has built up the Rent Arrears where there is a risk of insolvency.

Statutory Demand

A Tenant may be served with a Statutory Demand if the arrears are £750 or more. If payment is not made within 21 days action can be taken by the Landlord to make the Tenant bank if an individual or winding up petition where the Tenant is a company, however this is unlikely to assist the Landlord and courts can be reluctant to the winding up process simply for debt recovery.

Forfeiture

Most Leases will give the Landlord the right to end the Lease and recover possession if there is a breach of any covenant under the Lease including where rent arrears accrue for a period of days for example 21 days or if the Tenant as an individual is made bankrupt or a Tenant Company has a receiver appointed or goes into liquidation. Forfeiture can take place by the Landlord peaceably re entering the premises or by court proceedings.

Re Entry

If the let premises are not occupied the Landlord can consider re entering with a view to reletting. Action can still be taken to pursue the Tenant for a debt action for the rent arrears. The Landlord will not always wish to re enter as he may not be able to find another Tenant and will be responsible for the outgoings of the premises whilst it is vacant.

Section 6 Notice

Under the Law Of Distress ( Amendment) Act 1908 a Head Landlord can serve a Section 6 Notice on any sub tenant that may be in occupation to pay to the Head Landlord direct any rent due under the sub lease rather than to the immediate Landlord who may be in arrears. This can be effective and simple to achieve where there are sub leases in place.

Court proceedings

A Landlord may commence court proceedings against a Tenant and can seek a summary judgment where there is no defence to the claim. The judgment can then be enforced against any of the Tenant’s assets through court enforcement procedures. Court action can however be expensive and time consuming for the Landlord.

As you can see from the various options above there is much for the Landlord and for the Tenant to consider and seeking professional advice at an early stage when the first signs of difficulty rears its head can help alleviate a problem which may otherwise escalate uncontrollably whereby both parties will suffer.

For Legal Advice on all Commercial Landlord and Tenant matters both contentious and non contentious please contact Allison Bunney Head of Commercial Property Coodes Solicitors Elizabeth House Castle Street Truro Cornwall TR1 3AP contact allison.bunney@coodes.co.uk Telephone 01872 246200.

Thu 28th Oct 2010

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