Is your tenant in financial difficulty?

In this article Mairead McErlean from our dispute resolution teams looks at some of the issues which a commercial landlord should consider if it believes a commercial tenant is in financial difficulty.

Traditionally the remedies for non payment of rent are:

1. Forfeiture - a right to re-enter the premises for breach of a lease covenant and bring the lease to an end; and
2. Distress - a remedy which allows the landlord to seize and sell goods belonging to the tenant. In times when the market is buoyant forfeiture is usually the landlord’s preferred remedy.

It allows the landlord to enter the premises, take control, re-let the premises and move on thus minimising the landlord’s exposure to non payment of rent. However in a more difficult market landlords must look at whether forfeiture is in fact the best remedy, especially in circumstances where the premises may be difficult to re-let and the landlord may find itself liable to meet costs relating to the premises whilst they are vacant.

Where a tenant has failed to pay rent a landlord should at least consider the following as alternatives to forfeiture. 

Distress

Distress allows the landlord to seize the tenant’s goods and sell them, applying the proceeds of sale to unpaid rent. It is not quite as straightforward as the landlord simply attending at the premises and collecting some goods. There is a proper process to follow which involves ascertaining whether the landlord is entitled to levy distress under the lease and the service of notices. Advice should be taken by a landlord prior to levying distress.

Distress is a remedy which can be used more than once. Therefore each time the tenant fails to pay rent it is open to the landlord to levy distress. There are real benefits to levying distress promptly. If a tenant is in real financial difficulties it is likely that the tenant’s assets will decrease as time passes. The sooner distress is levied better the chance of making a recovery.

In a situation where a tenant is picking and choosing which debts to pay, if it is aware that a landlord will immediately levy distress it is more likely to prioritise its rent payment above other debts. The most advantageous aspect of distress for a landlord is that by using this remedy there is a real and immediate chance that the landlord will receive funds.

Accept Rent from a Third Party

Where a tenant is part of a group of companies, whilst it may be unable to pay the rent itself another group company may be willing to pay the rent on its behalf. This is clearly in the landlord’s interest, but there is a risk that by accepting the rent from a third party that a landlord and tenant relationship could be implied.

Landlords who wish to accept rent payments from a third party should make it clear in writing that the third party is paying rent as agent and a landlord and tenant relationship will not be created with the third party. The landlord should continue to address rent demands to the tenant and not to the third party.

Personal Guarantees from Directors or Group Companies

If the landlord obtained a personal guarantee at the outset of the lease the terms of the guarantee should be carefully checked. Many guarantees allow proceedings to be brought against the guarantor for any unpaid sums without first having to bring proceedings against the tenant.

If action is taken promptly it allows the landlord to assess the ability of the guarantor to pay. If it becomes apparent that neither the tenant nor the guarantor is able to pay rent the landlord is able to use this knowledge when considering its other options such as forfeiture.

If a guarantee was not obtained at the outset of the lease discussions should be held with the tenant and its directors. If the directors are confident of the tenant’s ability to continue trading they should be willing to back that with a personal guarantee.

Tenants often explain to landlords that they are experiencing a difficult trading time but anticipate being able to trade out of it. The tenant is asking the landlord to grant it a period of grace in order to attempt to trade through difficult times. There is an advantage to the landlord of this. If the tenant is successful the building will remain let and the landlord’s income stream will be maintained. The landlord should however at least consider asking the directors to consider bearing or at least sharing the risk.

Diversion of an Under Tenant’s Rent

If a tenant has sublet the premises the usual process will be for the sub-tenant to pay rent to the tenant and the tenant to pay rent to the landlord. In circumstances where the sub-tenant is paying rent, but the tenant is not forwarding it to the landlord, the landlord should consider serving notices under the Law of Distress Amendment Act to divert rent from the sub-tenant to the landlord.

County Court Proceedings for Unpaid Rent or Insolvency

These are the usual remedies for any unpaid debts. Landlords, unlike other commercial debtors, have more options, but these are still options which should be considered. For example if the tenant has significant assets which are stored at other premises there may be merit in obtaining a county court judgment followed by a charging order to secure the landlord’s position over those assets.

For any further information on this matter please contact Mairead McErlean.