With the law of distress due to be substantially updated on 6 April 2014 (see our previous article for further information), there will be a new focus on rent arrears and landlord's remedies for collecting them. In order to maximise their position and prospects of recovery, landlords should ensure that they are fully on top of their tenants' rent accounts and well advised from an early stage. A delay in taking action could result in greater and irrecoverable losses.
We set out some signs below that might indicate a tenant is likely to default and some tips for how a landlord can protect itself:
Early warning signs
Tight credit control: don’t let arrears build up
Prevention is better than cure. It is essential to keep a regular check on a tenant's rent account and to take action if payment is not made promptly.
A tenant may also approach you and seek monthly rents or a reduction in the amount it pays. Even if you are inclined to accept this, you should take legal advice to make sure that it is documented appropriately, and that it does not affect your rights against any third parties such as guarantors or previous tenants.
Persistent late payments or rent being paid by a third party
Keep a careful eye on when payments are made, and the name of the party that is making payment. A pattern of arrears can indicate that a tenant is struggling to meet the rental payments, whilst payments by a third party could mean the same thing, or that the tenant has allowed someone else into occupation.
If you have suspicions that a tenant is struggling, it can be very useful to carry out external inspections or occupancy checks. This will help to ensure that the property is not being used by third parties or for the wrong purpose. Similarly, if the property has been allowed to decline and look shabby, or if there are obvious reductions in staff/opening hours or permanent sales or reduced stock, this could be an indication that the tenant is not trading well.
If you have tenants that are substantial enough to be in the press, be alert to any news stories on profit warnings, share rights issues, or generally negative trading statements. Similarly, filings at Companies House can tell a story, so watch out for bulk resignations of directors or late filing of accounts.
If you are trying to get hold of the tenant and being met with a deafening silence, this can sometimes be an indication that the management teams are dealing with financial issues. Silences coupled with regular defaults or late payments could be an indication that the tenant is experiencing difficulties.
Pre-emptive strikes for landlords
Do you want the property back?
If taking the premises back would be appealing to you, make sure that you seek early advice before taking any action. If you wish to preserve the right to forfeit the lease, you should be certain that you will not waive the right before you have had the chance to exercise it.
If you have suspicions that the tenant is insolvent and it owes you money, you should be seeking advice on how to act quickly. If the tenant is actually insolvent, then it will shortly be folding anyway, and so you should be seeking to preserve your own position. In particular, if you have a number of tenants in a building, they may well talk to one another, and you may not want to have a reputation for being a soft touch landlord.
Distraint / CRAR
If the tenant has valuable items on site, you may wish to consider sending in the bailiffs or, after 6 April 2014, using CRAR. Taking action swiftly will be the best way to protect your position if there are other creditors looking for payment.
There is a range of third parties from whom it might be possible to recover payment. This could include guarantors, "old" tenants (ie where the leases predate the Landlord and Tenant (Covenants) Act 1995) or subtenants. Again, if the tenant fails to make payment, you should seek advice to see whether you have rights against any such party.
Sometimes it will be necessary to serve statutory notices – for example to claim rent from a pre-1995 Act tenant/guarantor or a subtenant where the head tenant has defaulted – and so these must be served in good time to protect your position.
Administrators / liquidators
Finally, if the tenant does go into a form of liquidation, do not allow yourself to be intimidated into accepting a surrender or non-payment. Instead, seek advice on your options and on how to deal with the administrator or liquidator.
In particular, a very recent case decision has changed the way in which administrators and liquidators will have to make payments of rent for periods during which they are using the property for the benefit of the insolvency involving Game.
Please note that this case is now being appealed, and further updates will be provided when available.
If you are holding a deposit, it will be very important to understand how it is held and whether it is the right time to draw down on it. Not all rent deposit deeds are created equally, and so you should seek advice on the mechanism. This will be particularly important if the tenant does go into a form of insolvency, as the administrator or liquidator may also try to claim the deposit.
Although you cannot prevent your tenant from defaulting or entering into an insolvency process, you can ensure that you are fully up to speed and ready to take action if required. This could mean the difference between recovering a significant proportion of what is owed – or a tiny fraction.