Advice to commercial landlords as the June quarter rents fall due

25 June 2009 - The green shoots debate was recently reignited after the Office for National Statistics confirmed that the UK's manufacturing output had increased by 0.2% in both March and April of this year. Similarly, surveys from the services, construction and housing market are each offering a more promising outlook for the coming months.

But, as things appear to be improving, cash flow remains vitally important for businesses and "payment of rents is a major part of that", commented James Cross, Head of Property Litigation at Bay law firm, Kitson Hutchings. "For commercial landlords and tenants, the payment of rent is very important. The June quarter is here and will no doubt have an effect on which businesses can survive, and which can't."

Locally, the results are plain to see. "Ghost high streets drain life from towns," (March 2009), as reported by The Sunday Times, highlighted that 22% of shops in Torbay are vacant compared with 6.8% six years ago, and properties are emptying all the time. 

James Cross states, "In a buoyant commercial climate a landlord will have no hesitation in acting quickly to remove the tenant. The lease is forfeited either through peaceable re-entry or the Courts, and the property is re-let to a new tenant.  Steps would then be taken to recover rent arrears from the outgoing tenant or if there wasn't one, from their guarantor." 

However, in the current economic climate, unpaid rents can present a far more difficult situation with the clear possibility of empty premises to deal with. Rebecca Weare, Associate Solicitor, Kitson Hutchings Property Litigation Team, explains, "In the present market, terminating the lease by peaceable re-entry could mean empty premises for which there is no-one interested in taking occupation, and the likelihood that rent arrears cannot be recovered as the outgoing tenant is in liquidation."

So, what action should the landlord take?  The Kitson Hutchings Property Litigation Team advises, "As soon as the tenant is late with a rent payment, the landlord is put on notice that the tenant is likely to be in financial difficulties. A prudent landlord will already be in close contact with the tenant and will be able to assess whether it is a temporary problem or whether the tenant's business is failing." 

"The landlord may be able to help his tenant's business survive by reaching an agreement with him to help ease cash flow for a limited time.  Alternatively, the landlord could consider accepting rent monthly rather than quarterly, reducing the rent for a period, or agreeing to a rent-free period. Another option may be to link the rent payments to the tenant's turnover so that as soon as the tenant's business starts to recover the rent payments increase again.  The landlord may consider allowing the tenant to sub-let, assign or share possession of the premises."

James further advises, "Caution must be exercised before accepting late rent payment or part payment in respect of the arrears. Acceptance of rent may restrict the landlord's ability to forfeit the lease in future.  Similarly with any agreement that alters the terms of the lease the landlord should check with his solicitor to ensure that necessary steps are taken to protect the validity of the lease." 

And, if problems are far more desperate, James advises, "If there is good reason to suspect that the tenant's financial problems are so serious that they are going to go into administration, a landlord should terminate the lease as soon as possible. Once the tenant is in administration he will be unable to forfeit the lease without permission of the Court or administrator."   

If there is a guarantor then the landlord may consider requesting rent payments from him in default of the tenant.  Alternatively the landlord can recover rents from former tenants within six months of arrears falling due providing he serves the appropriate notice. 

To conclude, James and Rebecca highlight some key points:

1) Exercise caution before accepting part or late payment of rent to ensure that it does not affect the right to forfeit the lease. Act quickly if there is a real risk that the tenant company is going into administration.

2) Consider negotiating a variation in terms with tenant but ensure that any agreement does not invalidate the lease.

3) Consider whether to recover monies from guarantor or former tenant.

4) Finally if all else fails, forfeit the lease. 

For advice and assistance on Property Recovery and Litigation matters, please contact James Cross and/or Rebecca Weare on (01803) 202020 or james.cross@khlaw.co.uk and rebecca.weare@khlaw.co.uk.

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