Commercial Rent Arrears Recovery Guide

Rent Arrears – Points to note for 2024

Distress

• Tenant insolvencies are ‘on the up’ and in 2023 hit their highest levels since 2009. It is important to bear this in mind when contemplating which method of enforcement to take.
• For example, where a tenant enters into a Company Voluntary Arrangement (CVA) or Restructuring Plan, rent arrears that existed before the CVA are “compromised” and the majority of a landlord’s option for recovering them fall away.
• And where a tenant has fallen into administration, forfeiture is not an available remedy (for legal proceedings and peaceable re-entry) except with the permissions of the Court or the consent of the administrator.
• If you would like detailed advice on the potential ramifications of tenant insolvency on a landlord’s ability to recover rent arrears please get in touch, we would be happy to assist. Our contact details are on the final slide.

Forfeiture and commercial rent arrears recovery available

• Landlords who want to preserve their right to forfeit must be careful not to waive their rights by acknowledging the ongoing existence of their tenant’s lease.

Rent Arrears - Landlord's Options

A PDF version of the above flowchart can be downloaded here.

Commercial Rent Arrears Recovery

CRAR allows a landlord to take control of a tenant’s goods to the value of the rent arrears.

To proceed, 7 clear days’ notice must be given to the tenant and after this notice period has expired the arrears can be enforced by a certified enforcement agent.

There is a risk that a tenant may remove goods from a property when they receive the notice, which can limit the success of CRAR, although it can be that the threat alone of enforcement can bring forward payment from a tenant.

Additional points to note are:

• Under the legislation, only principal rent (including VAT and interest) can be recovered using CRAR (i.e. not service charge or insurance rent even if they are reserved as principal rent in the lease).
• CRAR can only be used for commercial premises and any residential accommodation must be under a separate lease (otherwise a court order is required).
• The net unpaid rent must be equal to or exceed 7 days’ rent. For the calculation of unpaid rent, interest and VAT are excluded notwithstanding that they can be recovered by exercising CRAR.
• Goods can only be recovered to the extent that they belong to the tenant. If any goods belong to a third party (such as through a hire purchase agreement) then those goods cannot be seized.
• “Tools of the trade” up to the aggregate value of £1,350 are exempt under the legislation. Accordingly, even if owned by the tenant, they will be able to keep some of these goods to continue to operate.
• The cost of instructing the enforcement agent will be recoverable against the value of the goods sold.

Pursue Other Parties

There are a number of other parties that a landlord could pursue, including:

Subtenants

If the tenant has sub-let the property and has failed to pay at least 7 days’ net rent, notice can be served on the sub-tenants pursuant to section 81 of the Tribunals, Courts and Enforcement Act 2007. The section 81 notice tells the sub-tenants that the tenant has failed to pay rent and requires the sub-tenants to pay rent directly to the superior landlord until the tenant’s rent arrears are paid.

Former Tenants

“New Leases” – If the lease was granted after 1 January 1996, a former tenant and former guarantor are released from all liability on assignment, unless they gave an Authorised Guarantee Agreement at the time of assignment or the lease is granted pursuant to an agreement or court order that was made before 1 January 1996. In that case, the landlord can serve a section 17 notice as below.

“Old Leases” – If the lease was granted before 1 January 1996, the landlord can pursue the original tenant (or original guarantor) for the arrears by serving a section 17 notice in accordance with the Landlord and Tenant (Covenants Act) 1995. This notice must be served within six months of the arrears first becoming due. The notice must specify the arrears due, be in the prescribed form and (if it is anticipated that further sums will be due in the future) state that there is a possibility that the liability would be greater than that specified in the notice. The notice can cover principal rent and service charge. If a former tenant or guarantor makes a payment following this notice they are entitled to call for an overriding lease.

Guarantors

A guarantor may be liable for lease liabilities. A landlord can demand payment from the guarantor by notice in accordance with the guarantee terms. It is also vital to ensure that any rent concessions agreed with tenants do not constitute a variation of the lease as this could release the guarantor from liability.

If you would like to discuss your options for recovery of rent arrears, please contact a member of our real estate disputes team set out in the key contacts below.

With thanks to Joe Perry-Courtade, Debbie Eliad & Maresa Morris for their contributions in producing this guide.