Commercial landlord and tenant law can be complex, particularly when disputes arise. For example, you need to know what approach you can take as a landlord if you’re in a situation where your commercial tenant is not paying rent.
However, navigating the intricacies of this process requires an awareness of the key steps and considerations, and it is imperative that you are aware of your legal rights and obligations. Our team are specialists in commercial property law and can assist you in a range of business legal services.
In this post, we will address your options if your commercial property tenant is not paying rent, including the benefits and potential risks of each.
Can You Evict a Commercial Tenant for Not Paying Rent?
Yes, there are several options for landlords to evict a commercial tenant for not paying rent. Landlords should consider all options open to them, including:
- Forfeiture;
- Insolvency;
- Deby Recovery Proceedings; and
- Commercial Rent Arrears Recovery.
Read on to learn more about these four options, or check out our video below to discover what to do if your business tenant is not paying rent.
Find Out Why Your Business Tenant Is Not Paying Rent
Firstly, it might be worth determining why your commercial tenant is not paying rent before rushing to take action. Perhaps it is due to financial difficulties, but it may result from a different problem; for example, they may not believe you are fulfilling your legal obligations as a landlord. Whilst the tenant is likely to be prohibited from “setting off” any sums it feels you owe against any sums it owes to you, the reality is that this does sometimes happen, and it is often easier, faster and less expensive to resolve such issues with conversation, rather than combat.
You might wish to start a conversation and try to discover why your commercial tenant is not paying rent before taking legal action, as it may assist you in resolving a dispute early.
Commercial Tenant Not Paying Rent: A Breakdown of What Landlords Can Do
If your business tenant is not paying rent, take a look at the options you can take below and weigh up the risks of each. Before settling on any method, we strongly recommend you seek guidance from a legal professional from one of our offices to help you navigate this process.
Forfeiture
Forfeiture refers to the legal process by which a landlord terminates a lease and reclaims possession of the property due to the tenant breaching the lease terms. Most commercial leases provide for a forfeiture clause, and there are two options open to landlords to effect forfeiture:
- Landlords can effect peaceable re-entry and change the locks; or
- Alternatively, landlords can obtain an order from the court.
Pros:
Due to the disruption to business, tenants can rarely afford to face the risk of their landlord enforcing forfeiture against them, as this would necessitate locating alternative premises at short notice and incurring significant relocation costs.
Considerations:
There are some potential risks associated with forfeiture:
- Tenant turnover
Landlords must carefully consider whether effecting forfeiture will result in a void period before another tenant is obtained. No rental income could result in significant financial and operational implications. Plus, finding a new tenant can be time-consuming and expensive, involving marketing, viewings, and lease term negotiation.
- Wrongful forfeiture
Additionally, landlords need to ensure they do not waive their right to forfeit by inadvertently acknowledging the ongoing existence of the lease and being exposed to a potential claim for wrongful forfeiture. As a result, landlords need to weigh up whether to delay matters and seek a formal order from the court, as opposed to effecting peaceable re-entry.
Landlords also need to remember to delay advertising the premises for letting and obtaining another commercial tenant until it is known whether a claim is to be made for wrongful forfeiture. If a landlord does obtain another tenant and the original tenant successfully claims wrongful forfeiture, damages will become payable to the original tenant.
Insolvency
If a commercial tenant is not paying rent, landlords can seek to make their tenants insolvent. This applies where individual tenants are not able to meet their debt obligations as they come due. A Statutory Demand may be served on the tenant, and, if the payment is not made in 21 days, the landlord might be able to present a bankruptcy or winding up petition.
Pros:
For tenants, the presentation of a bankruptcy petition or a winding up petition is likely to have significant implications on their business, as its credit rating will be adversely affected. Sometimes, just the threat of insolvency will suffice in obtaining settlement of any overdue payments.
Considerations:
For landlords, this is a drastic step to take. There is no guarantee that presenting a petition will provide rent payment, as any assets the tenant has will be distributed to all its creditors, in a particular order according to insolvency rules. Furthermore, certain insolvency proceedings can present a risk to the landlord and make it more difficult to regain control over the property.
Debt Recovery Proceedings
Landlords can issue court proceedings to obtain a County Court Judgment (CCJ) against the tenant for rent arrears accrued. As a precursor, commercial landlords are expected to follow the pre-action protocol for civil claims and send a letter before action, providing the tenant with an opportunity to pay the rent owed.
Pros:
Initial court proceedings to obtain a CCJ offer landlords a formal legal mechanism to recover rent arrears, ensuring tenants are held accountable for their financial obligations. After all, with a CCJ in place, landlords gain access to several enforcement methods, such as seizing assets and garnishing wages. This can lead to the recovery of outstanding rent to support the landlord’s financial stability.
Considerations:
Unfortunately, obtaining a CCJ is only the first step. Once obtained, landlords must move on to enforcement and obtain payment from the tenant. This means CCJs may not be worthwhile, unless the tenant has income or assets to enforce against. In this case, a Statutory Demand may be a better choice.
Debt recovery proceedings can be lengthy and complex. For example, landlords may have to obtain a charging order or a third-party debt order. Additionally, landlords can instruct the court bailiff or high court enforcement officer. Still, ordinarily, landlords would use the Commercial Rent Arrears Recovery process, which you can read more about below.
Commercial Rent Arrears Recovery
A common way to address commercial tenants not paying rent is through Commercial Rent Arrears Recovery (CRAR). This involves the instruction of licenced enforcement agents who will either obtain payment of rent due or seize goods at the premises to cover the rent due. Before this is conducted, former tenants must be notified within specific fixed timescales – see our guide to CCAR for further information.
The agent will either:
- Enter into a controlled goods agreement (formerly known as walking possession) of the goods at the premises, taking an inventory, and obtaining the tenant’s signature to confirm the goods identified on the inventory will not be sold until the rent arrears are paid;
- Secure goods at the premises; or
- Remove goods from the premises.
Ordinarily, the agent provides seven days‘ notice of their attendance.
Pros:
This process is relatively simple if the tenant has valuable goods at the premises. If this is not the case, there are other options a landlord can take. For example, they can also draw down on rent deposits and require a top-up or pursue guarantors for arrears. This includes either a guarantor under the lease, or any former tenants who have entered an Authorised Guarantee Agreement (AGA).
Considerations:
While CRAR may seem straightforward, the landlord has to pay associated costs with hiring licensed enforcement agents and covering the legal procedures involved. Furthermore, if the tenant’s goods fail to cover the full amount of rent arrears, the landlord might still have to pursue additional legal action to recover the remaining debt, adding to further costs.
How to Choose an Option When Your Commercial Tenant Is Not Paying Rent
When considering your options, you should keep the following questions in mind:
- Was the tenant a reliable rent payer before running into short-term difficulties, or have they missed previous payments?
- Does the tenant have a guarantor to help cover outstanding rent?
- Has the tenant broken any other lease terms, besides non-payment of rent?
- Would you like to keep the tenant, or take the time to find a new one?
Sometimes, dependent on your previous relationship with the tenant (and the factors causing the non-payment), you may conclude that there are better short-term options to consider. For example, you might consider a rent reduction. This can enable your tenant to get through short-term financial difficulties before returning to their previous financially secure state. Remember though, if you come to an agreement with your tenant relating to a temporary reduction in rent, this must be documented by written agreement to avoid any future legal problems or disputes.
Seek Assistance when Your Commercial Property Tenant Is Not Paying Rent
Landlords have a number of weapons in their armoury if commercial tenants are not paying rent, and they need to consider carefully which route to go down.
Should you require any assistance in relation to commercial property law and commercial rent arrears, please get in touch with us at Newtons Solicitors. Our commercial property team can offer the right experience and knowledge to help you navigate this complex process.
Additionally, for more handy insights, be sure to take a look at the rest of our blog.
About the Author
Inderjit Gill is a highly respected commercial litigation solicitor with over 20 years of experience acting on behalf of businesses and company directors. He specialises in all areas of commercial litigation, including debt recovery, contract disputes, property disputes, and more.