Dealing with non-payment of rent and a tenant that is struggling financially can be tricky business. But there are ways that you can tackle tenant insolvency and reduce risk to your business. With the right commercial property legal advice you can explore the right route to take and recuperate your losses.
Here, we'll consider:
What options does a landlord have if a tenant fails to pay rent?
If a tenant fails to pay rent a landlord may wish to consider the following:
- Do nothing (this may be appropriate if the market is weak and/or there are other commercial influences)
- Participate in an alternative dispute resolution process (such as negotiation or mediation)
- Issue a claim in the courts (There is a specific procedure for non-payment of commercial rents – CRAR)
- Call in any security (such as payment by a guarantor or drawing from a rent deposit)
- Forfeit the lease
- Bring insolvency proceedings – Serve a statutory demand and/or petition to wind up the tenant (if a corporation) or for bankruptcy (if an individual)
Commercial rent arrears recovery (CRAR)
Commercial rent arrears recovery (CRAR) is a specific method of enforcement action relevant to commercial property rental arrears.
On 6 April 2014 new law came into force (which is governed by the Tribunals Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013).
It became mandatory, upon the CRAR regime coming into effect, on 6 April 2014, for the CRAR process to be used as a means of recovery of commercial rent arrears and replaces the rights of redress in common law.
The commercial rental arrears recovery process provides for a landlord to instruct agents tasked with enforcement to take over control of a tenant’s assets and sell them to effect recovery of an equal value to the rent arrears.
CRAR sets out a staged process within which various notices are required to be sent by the enforcement agents to the tenants. Although there is no specific form of notice, the CRAR does provide for a set of minimum information to be included.
Advantages of CRAR:
- Can be quick and efficient means of recovering arrears
- Limited costs as the cost of enforcement is borne by and recovered from the tenant as part of the enforcement recovery
Disadvantages of CRAR:
One notable disadvantage of using CRAR is that it will have the effect of waiving any right to forfeiture that may have arisen. Given this, prior to taking action as part of the CRAR process, a landlord should take specific advice and explore:
- Whether it will matter that any right to forfeit will be lost in consequence
- How the landlord will deal with any existing breaches of the lease (other than the non-payment of rent)
As the tenant is required to be given seven days’ notice of the potential enforcement action, it provides the tenant with the opportunity to dispose of or ‘hide’ its assets prior to seizure.
Court action may be taken in certain circumstances. Ordinarily a claim could be brought in the civil courts for a commercial property dispute or debt due. As noted above however, where the CRAR regime applies, a specific procedure must be followed. Alternatively, a landlord may bring court action in respect of forfeiture or insolvency-based petitions, both of which are detailed below.
Forfeit of a lease
Forfeiture of a lease is a process by which a landlord exercises a right to terminate a lease. This is also sometime referred to as ‘re-entry’.
A lease can be forfeited:
- Where the tenant has breached its obligations under a lease and/or
- In specific circumstances which are expressly detailed in the lease (further details below)
Before forfeiting a lease, a landlord should ask themselves:
- Is the forfeiture appropriate in the circumstances?
- Is there a benefit to taking back possession?
- What is the market like? Will you be able to find a new tenant quickly?
- Are there any guarantors or other forms of security (rent deposit) that can be called upon to address any arrears in rent, if this is your concern?
- Can the property be secured? (risk of squatters)
- Does the property need to be developed/would benefit from development?
Ordinarily a right of forfeiture may only be exercised if it is expressly provided for within the lease. The exception to this is that the landlord may have ‘implied’ right where the tenant has breached a condition (a fundamental requirement of the contract). Principally this includes non-payment of rent, assuming that payment of rent is a condition of the lease (which would normally be the case).
Forfeiture of a lease for non-payment of rent can be affected in the normal way (by peaceful re-entry or a court order).
A landlord should be aware that:
- If rent is accepted despite the landlord knowing that there has been a breach of the lease, the landlord is likely to be deemed to have accepted that breach and given up its right to forfeiture (known as ‘waiving’ its right)
- A landlord may wish to refuse to accept rent, to avoid waiving its right to forfeit. However, if the grounds for forfeiture are non-payment of rent, it will practically be hard for the landlord to resist. This is because a tenant has an opportunity to claim relief from forfeiture and payment of arrears is a key factor in supporting such a claim.
Tenant insolvency processes
If a tenant becomes insolvent, all the options noted at the outset will continue to apply. The key differences, however, are that:
- If insolvency proceedings have not already commenced, the landlord may wish to instigate these
- If insolvency proceedings have commenced, then the landlord will now likely need to deal with an administrator, liquidator or receiver appointed to deal with realisation and distribution of available assets
- It is possible that even if the landlord has a strong claim against the tenant, unless there is a form of security that can be called on, actual recovery of arrears may be diminished or entirely lost (depending on the extent of the financial issues of the insolvent tenant)
In insolvency situations, a variety of procedures may apply. These are discussed below.
Creditors’ Voluntary Arrangement (CVA)
A creditors’ voluntary arrangement is a method of arranging for the repayment of debts to creditors as part of a protected repayment plan, avoiding administration or liquidation of the tenant. CVAs if agreed with a sufficient proportion of the creditors can be binding on all creditors.
Administration relates to corporate entities and is a process by which a company is moved under the control of an administrator (an insolvency practitioner) with a view to achieving specified statutory objectives.
- To rescue the company
- If rescue is impossible, the aim is to attempt to achieve a better result for the creditors than would be the case if the company was put into liquidation
- If the administrator cannot achieve a better result for the creditors, then any property should be sold and secured, and preferential creditors paid
The company may move from administration to liquidation.
To support the objectives of the administrator, a moratorium (block) is provided under which creditors are prevented from bringing legal proceedings. A landlord should therefore be aware that any legal proceedings that they may otherwise have intended to bring will not be effective whilst a tenant is in administration.
Receivership is a process by which a receiver is appointed to take control of a debtor’s asset(s). A receiver is often appointed by a bank and usually arises as a result of a contractual right under security documents. The purpose of a receiver’s role is to sell a specific asset (or a number of assets) which is/are the subject of a security and then use the proceeds to discharge the debt to the charge holder.
A landlord may appoint a receiver a means of recovering debts due if it holds and security of the tenant’s assets (such as a mortgage).
Liquidation involves the appointment of a liquidator, the realisation of assets, distribution of proceeds (once costs of liquidation have been paid) and finally the winding up of a company.
Prior to commencing a winding up petition, a landlord may wish to first consider serving a statutory demand. This is a formal notice which is a pre-curser to a winding up or bankruptcy petition. It can exert significant pressure on a recipient. This is because they will be required to either pay or challenge the demand within a very short period of time. A challenge will require evidence of a genuine dispute and/or that the landlord has sent the notice abusing the process. An unanswered statutory demand is, on the face of it, evidence of insolvency/bankruptcy which can be used against the tenant in a subsequent winding up or bankruptcy petition
Spotting when a tenant is struggling to pay and tips for landlords
A landlord should be alert to the following:
- Regularly late rental payments
- Increasing periods of lateness of payment
- Missed payments and arrears
It is advisable not to allow arrears to build and a landlord should take action (albeit this does not necessarily mean taking an aggressive stance with litigation). Early communication with the tenant can avoid surprises later and allow a landlord to gauge the severity of the circumstances and potentially take pre-emptive action.