Recovering Rent Arrears From A Commercial Tenant

Few things present more of a headache to landlords of a commercial property than recovering rent arrears.  The rate of rent may have been set years ago when the economy was more robust.  Most landlords have sympathy for tenants who are struggling to pay rent; however, they are the ones who remain liable for mortgage payments.

The Commercial Rent Arrears Recovery (CRAR), which came into force in April 2014, did away with a landlord’s right of distress, which had been around for over 800 years.  The distress remedy allowed landlords to recover rent arrears by seizing assets without the need to go to court or provide a prior warning.  The CRAR provides for an often-complex process which includes the requirement to serve notice on the tenant before goods are seized.

Before attempting to recover rent arrears, it is crucial to seek professional advice, as seizing goods to pay for unpaid rent without following the correct protocol, under CRAR could see a landlord liable for a civil penalty.

First things first

Before acting to recover rent arrears, a landlord should consider:

  • whether to forfeit the lease for non-payment of rent
  • whether the tenant is insolvent and the effect this will have on recovery
  • if the arrears are older than six years – if so they generally cannot be recovered

The need to consider forfeiture illustrates the importance of obtaining legal advice because any acceptance of rent owed could relinquish any right to forfeiture.

Exercising rent recovery rights under CRAR

Before the process under CRAR can begin, there must be a net amount of seven days’ unpaid rent, and the premises must be wholly used for commercial purposes.  Also, you can only recover rent, VAT and interest.  Service charges, rates and insurance are not recoverable under CRAR.  If other elements such as service charges are included in the rent payment, CRAR will only apply to the part of the arrears which is “reasonably attributable” to the use and custody of the property.  Landlords must recover other charges by taking civil action, which can add to a landlord’s legal costs and stress.  Instructing an experienced solicitor who has a strong record of accomplishment in settling disputes outside of court goes a considerable way to alleviating these factors.

In a considerable departure from the old law of distress, and one that swings favour heavily on the side of the tenant, landlords must provide seven days’ notice before enforcement agents enter the property to seize goods.  The seven days cannot include Sundays, Bank Holidays, Good Friday or Christmas Day.

The purpose of this is to provide the tenant with an opportunity to pay the arrears before the enforcement agents arrive.  However, by doing so, it takes away the crucial element of ‘surprise’ present in the distress remedy.  Tenants have the time to remove valuable stock or even disappear entirely.   A landlord may dispense with notice only if there is a reasonable chance that the tenant may try and dispose of or relocate any goods.  However, to rely on this provision, the landlord must be confident he or she can produce objective evidence of such a fact that will satisfy the court.

Subtenants and the CRAR

If the defaulting tenant has sub-leased part of the property, then under the CRAR, the landlord can require the sub-tenant to pay rent to them directly.  If the sub-tenant then fails to pay, the landlord can exercise the CRAR procedure against the sub-tenant.  But landlords must consider whether it will preclude other potential actions (e.g. if the sublease was granted in breach of the Lease Agreement, seeking to recover from the subtenant will waive the landlord’s right to forfeit the lease and would also make it highly unlikely that the court would order the surrender of the sublease).

Pre-Action Protocol for Debt Claims

From 1st October 2017, the Pre-Action Protocol for Debt Claims (the Protocol) applies where any business (including a sole trader and public body) is claiming payment of a debt from an individual (including a sole trader). It describes the conduct which the court will expect from the parties, before the start of proceedings, including the information to be set out in the initial letter of claim. It aims to encourage early communication and exchange of information to help clarify any issues in dispute, to enable the parties to resolve the conflict without having to go to court.  The consensus is the Protocol does not apply to commercial landlords seeking relief from rent arrears under CRAR; however, this may change as the use of the Protocol becomes more embedded.

In summary

Recovering rent arrears is undoubtedly more expensive under the CRAR than it was under the remedy of distress.  There is also more scope for landlords to limit their ability to forfeit a lease and replace unprofitable tenants.

Obtaining legal advice on how to manage rent arrears in a commercial tenancy is imperative.  An experienced solicitor can ensure the CRAR process is followed correctly, legal costs are kept under control, and all options are kept open.

Bennett Griffin are award-winning solicitors based in West Sussex with offices in central Worthing and Ferring.  Our experienced and specialist solicitors offer a comprehensive service and will work with you in an honest, considered and practical manner.  Our commercial property department can advise and assist you in relation to all landlord and tenant matters.  Please contact us on 01903 229 999 or by email at info@bennett-griffin.co.uk for more information.

The information contained in this article is for general guidance only and is not intended to be legal advice. Professional advice should always be taken on the application of the law in any particular situation.