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12

Sep 2017

Recovering unpaid rent from commercial tenants

A landlord faced with a tenant who is not paying their rent has two options: take steps to end the lease or try to recover the money owed. If you decide to recover the rent you might find the commercial rent arrears recovery scheme a good option, as David Hacker, commercial property specialist with Thackray Williams explains.

‘The commercial rent arrears recovery scheme is a self-help remedy for landlords which allows you to take and sell a tenant's goods to the value of what is outstanding.  There are limits on the circumstances in which the scheme applies, but outside of these restrictions it can be a very effective way to recover what you are owed.’

The commercial rent arrears recovery scheme

The key features to note are:

  • the scheme only applies to commercial premises, which means that if any part of the property let under the lease is residential the scheme is not available;
  • the rent being claimed must have been outstanding for at least seven days;
  • the tenant must not be in administration or liquidation and, if they are, the administrator or the court must consent before the scheme can be used;
  • the landlord may only seize goods kept at the premises let under the lease;
  • the scheme only applies to the main rent due under the lease, which means that insurance premiums, the service charge and other outgoings are excluded, even if the lease says they are reserved as rent
  • if the lease provides that the service charge and other expenses form part and parcel of the rent charge, the landlord will have to show that they are only seeking to use the scheme to recover that part of the rent reasonably attributable to the tenant’s possession and use of the premises;
  • the landlord must appoint a certified enforcement agent (broadly the same as a bailiff) to recover the rent on their behalf; and
  • the tenant must be given seven clear days' notice before recovery under the scheme is exercised.
  • If you suspect that the tenant will try to move their goods to try to avoid them being seized, you can ask the court for permission to shorten the amount of warning notice you need to give them.  You can also side-step the prohibition on using the scheme where any part of the premises is being occupied for residential purposes if that use is in breach of the terms of the lease. 

Alternative options

If recovery under the commercial rent arrears scheme is not available, or is inappropriate, there are a number of other options that could be considered.  For example, if you took a rent deposit from the tenant you may be able to use this to cover the arrears, although you need to bear in mind that if you do this it will deplete what is left to cover other breaches.  This is likely to be the case even if the rent deposit deed requires the tenant to top up the deposit because the chances of the tenant being able to do this if they are already in arrears with the rent is extremely low.  

Can I claim against a guarantor?

If the tenant’s obligations under the lease are guaranteed by a guarantor, you may be able to claim the rent arrears from them. You may also be able to claim against a former tenant who remains liable under the lease, either because they entered an authorised guarantee agreement with you or because the lease was granted before 1996.  Any guarantor of a former tenant may also remain liable.  

There are, however, important practical points to note about enforcing against former tenants and guarantors:

  • landlords must serve notice of arrears on former tenants and guarantors within six months of the arrears falling due, under section 17 of the Landlord and Tenant (Covenants) Act 1995; and
  • a former tenant or guarantor who pays the full amount due under a section 17 notice has the right to call for a new overriding lease, which would sit between the landlord's interest and the occupational lease.This means that the former tenant or guarantor would once more be your immediate tenant and this may not be the outcome you want.

Conclusion

Recovering rent arrears from a commercial tenant can be challenging, but getting legal advice early on can greatly improve your chances of a successful outcome.  The commercial rent arrears recovery scheme can be a useful tactic and is significantly cheaper and quicker than making a claim through the courts.  However, you may have other options that might result in a better outcome and which need to be considered alongside this.  There may also be other factors at play, such as the tenant’s possible collapse into insolvency, that need to be considered and which may justify you bypassing attempts at recovery and going straight for forfeiture instead.  If this is the case you need to be careful not to prejudice your position by doing anything that could be construed as a waiver of your right to evict the tenant, such as subsequently accepting payment of rent arrears. 

If you need help recovering commercial rent arrears, or have any other commercial property issue that requires input from a solicitor, please contact David.

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