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 starts 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 for commercial property there is some good news – 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 that are available to deal with commercial tenant arrears. They’re helping to think bigger-picture and strategy wise in order to see what action can then be concluded in whatever situation you’re in.
And to make these easy to remember, we’ve compared them to the 5 fingers of your hand, as a ‘handy’ little helper of these (if you excuse the pun):
1. The Thumb, and Usual Payments
This is the usual procedure of credit control for chasing arrears, which usually brings in the majority of arrears on the book.
So, sending chaser letters, emails and phone calls – and making sure the right person or company actually received the invoice and is able to make the actual payment, often does the trick.
Also, kaing sure you have the right invoices and charges raised, usually on a quarterly in advance basis.
Because this tends to be a genuine dialogue with people, then you may be able to agree 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 being able to resort to usual remedies if not adhered to.
Plus, see if there are any other monies to use, for example deposits, or see if payments that can be made are allocated to the most important arrears such as rent rather than service charge.
2. The First finger, and CRAR
We have a whole 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 in order to provide the tenant 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 knowing who pays these, and remembering that the simple threat of this quite severe action can be enough to get payments back on track without having to actually follow through with things.
3. The Middle Finger, and Ending the Lease
The middle finger is the largest of them all, and therefore representing drastic action – ending the lease and therefore liabilities.
Although this may still 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 arrangements longer term.
There are three main ways to do this, the first is a simple break option in the lease that can may be triggered by both or one party with the right notice period.
Secondly, you may be able to forfeit the lease in order to end by law, which will need to be in line with any such clause in the lease and actioned like clock-work in order to be valid, and being aware of the right of relief for a tenant for six months after this.
And thirdly, agreeing to simply surrender the lease by the consent of both parties, to then be correctly documented.
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 as well.
Firstly, any guarantor under the lease 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 sub tenant 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 going forward.
Whichever party is being approached, check what any leases, documentation, and legislation prescribe how you go about this, right down to serving the correct notice at the best time in order to make sure you have a water-tight case.
5. The Little Finger, and Legal Action
The final stage is ‘going legal’ and brining solicitors in to help resolve things, often-in two forms.
Firstly, to legally pursue the arrears, often through court proceedings. This might be simple Small Claims, or full-on action, with any necessary Pre-action Protocols prescribing the right formant and timing to be complied with.
Plus, make sure the tenant actually 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 in order 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 important to understand. Whether that’s a landlord looking at action to take and recovery these, a tenant understanding what they might face, or an advisor needing to help come up with a workable solution.
In reality, most arrears can and will be paid with the right clarity and reminder. However, it’s those situations where it wont and matters therefore escalate, that you need to prepare for.
And what you tend to find is 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 big sums of money at a property that people get quite rightly concerned about.
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