Faced with rising operating costs, tenants may find it increasingly more difficult to meet their lease liabilities. Recent reports suggest that in some sectors inflation is leading to more casualties than Covid. Commercial landlords who are concerned with the impact their defaulting tenants will have on their cash flow may want to take action to address the arrears of rent, but what are their options?
1. Money judgments
The landlord could issue a claim at court and obtain a money judgment for rent arrears. However this will still need to be enforced if the tenant fails to pay. Enforceability will depend on whether the tenant has any assets worth pursuing. So, before committing to incurring costs at court, the landlord should take stock of the likelihood of recovery, otherwise issuing a claim may be a case of throwing more good money after bad. Note however, that before proceedings are issued there are certain protocols which a landlord should comply with. Where the tenant is an individual the pre-action debt protocol, found in the Civil Procedure Rules, may need to be considered and even in the case of a corporate tenant, it is always good practice to allow it a reasonable amount of time to pay before launching a claim. This will help to avoid any potential adverse cost penalties.
2. Statutory demand
Serving a statutory demand gives the debtor 21 days to pay the debt, failing which the landlord could apply to wind up the tenant company, or issue bankruptcy proceedings in the case of an individual. Given the serious ramifications this could have for the tenant, a statutory demand can be a very cost-effective tool in flushing the tenant out. If the threat of a statutory demand does not illicit payment, the landlord will then need to consider the cost-benefit of applying for a winding up petition or bankruptcy order, particularly as the likelihood of a return will depend on the existence of any higher ranking creditors.
3. CRAR - commercial rent arrears recovery
CRAR allows a landlord to instruct an enforcement agent to take control of a tenant's goods and sell them in order to recover an equivalent value to the rent arrears. This method is usually appropriate if the tenant is an asset rich business. If assets are not of high value and equipment used by the tenant is subject to a hire purchase agreement, CRAR may not be the most suitable option.
4. Forfeiture
Forfeiture is the landlord’s right to determine the lease by peaceably re-entering the property. We have previously published a five point guide which readers can access here. Many landlords will be reluctant to forfeit their tenant’s lease because unless they have another tenant lined up to take on the premises, as this will expose them to potentially even more costly business rates and utilities.
5. Guarantors
The terms of a guarantee can be very specific and the landlord should check the wording of the guarantee carefully to ensure it is entitled to pursue the guarantor for the arrears. Guarantors can either be pursued in tandem with the tenant, or separately. If the landlord is unsure of its rights, it is worth taking advice as there are stringent rules which govern whether guarantors (or former tenants) are still on the hook. We have previously addressed this in a separate post here.
Comments
The option which is most likely to result in payment will vary from case to case although before making a choice, landlords should always check whether their tenants, or any guarantor, are subject to any ongoing insolvency proceedings as this may limit the options available. It is also important that landlords consider all options available to them and the implication that each might have before making a decision.
Our real estates disputes team are experienced in advising both landlords and tenants when it comes to arrears, helping parties in navigating their way through the various issues that might arise and, where possible, resolve their disputes quickly.
Markus Klempa