As a landlord looking to make sure the rent and other monies are paid okay by tenants, it can soon become a nightmare when things don't go to plan.
Suddenly it can start escalating and promised late payments never materialise, leading to ever-increasing arrears. Then there's talk of expensive legal action to try and resolve.
But there is some good news for commercial property – you generally have more options and flexibility as a landlord to deal with things.
Therefore, with this focus in mind, here are five core options for dealing with commercial property tenant arrears.
Again, they're helping to think bigger-picture and strategy-wise to see what action can be concluded in whatever situation you're in.
And to make these easy to remember, we've compared them to the five fingers of your hand, as a 'handy' little helper of these:
1. The Thumb and Usual Payments
This is the usual credit control procedure for chasing arrears, which usually brings in most of the arrears in the end.
So, sending chaser letters, emails and phone calls – and making sure the right person or company receives the invoice and can make the actual payment, often does the trick.
Also, ensure you have the correct invoices and charges raised, usually quarterly in advance.
Because this tends to be a genuine dialogue with people, you may be able to agree on a sensible solution to the arrears, such as a payment plan over time.
However, make sure this is crystal clear, ideally in writing, and still be able to resort to usual remedies if not adhered to.
Plus, see if there are any other monies to use in the meantime, for example, deposits, or see if payments that can be made are allocated to essential arrears, such as rent, rather than the service charge.
2. The First finger and CRAR
We have a complete resource here on CRAR, which stands for Commercial Rent Arrears Recovery and overrides the previous Distress principle and 'sending in the bailiffs'.
In short, it can still end up with actual goods of a tenant being secured and sold to pay off debts, however, on a watered-down basis to provide the tenant with an opportunity to deal with things.
Also, this is only for rent arrears now, requires a legal Enforcement Agent to deal with, and has prescribed notices and time scales to adhere to.
Plus, watch out for fees being incurred and know who pays these, and remember that the simple threat of this severe action can often be enough to get payments back on track without having to follow through with things.
3. The Middle Finger and Ending the Lease
The middle finger is the largest of them all and therefore represents drastic action – ending the lease and liabilities.
Although this may leave existing arrears to chase as part of this termination route or as a separate option, this can help end a difficult situation and look at more viable longer-term arrangements.
There are four main ways to do this; the first is a simple break option in the lease that can be triggered by both or one party with the correct notice period.
Secondly, you may be able to forfeit the lease to end by law, which will need to be in line with any such clause in the lease and actioned like clockwork to be valid—also, being aware of the right of relief for a tenant for six months after this.
They are, thirdly, agreeing to surrender the lease by the consent of both parties to be correctly documented.
And fourthly, where the tenant has become insolvent, then certain entities like a Liquidator can disclaim and end the lease.
4. The Fourth Finger and Other Parties
So although the current tenant is directly on the hook to pay up under the current lease, there are three potential other people to chase.
Firstly, any guarantor that has covenanted under the lease to cover payments.
Secondly, any former tenants to the lease either under an Authorised Guarantee Agreement (AGA) or by law if a lease was granted before 1995.
And thirdly, any subtenant at the premises, as you may be able to service a Section 81 Notice under CRAR as above, requiring them to pay the landlord direct, which replaces the old Section 7 of the Law of Distress Act 1908. You might also need to liaise with them about future opportunities.
Whichever party is being approached, check what leases, documentation, and legislation prescribe how you go about this, right down to serving the proper notice at the best time to ensure you have a water-tight case.
5. The Little Finger and Legal Action
The final stage is 'going legal' and bringing solicitors in to help resolve things, often in two forms.
Firstly, to legally pursue the arrears, often through court proceedings. This might be a simple Small Claim, or full-on action, with any necessary Pre-action Protocols prescribing the correct format and timing to be complied with.
Plus, ensure the tenant has the assets and ability to pay these and watch out for legal fees soon racking up.
Secondly, is more to do with officially ending the legal status of the tenant to secure monies, typically through a Statutory Demand through the Insolvency Act 1986 if the debt is over £5,000 and outstanding for over 21 days.
Cracking Down on Commercial Tenant Arrears
Whatever interest you have in a commercial property, these five core options for dealing with tenant arrears are essential to understand.
Whether you're a landlord looking at action to take and recover these, a tenant understanding what they might face, or an advisor needing to help come up with a workable solution.
Most arrears can and will be paid with moral clarity and reminder. However, it's those situations where it won't, and matters escalate; you need to prepare for.
And you tend to find that even the threat of these options can help bring about a solution or another less-confrontational way of collecting the arrears.
After all, you can be dealing with significant sums of money at a property people are concerned about.
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