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Friday, 2 December 2011

What Can You Do if Your Tenant Stops Paying or Goes Bust?

These are hard times, and the light at the end of the tunnel seems to be getting dimmer and further away.

If you’re a landlord, what can you do if your tenant stops paying the rent or even goes bust?

If your tenant is still solvent but stops paying the rent (maybe it has a cash flow problem for example), most leases will give you the following options (if you can’t reach an amicable solution - and for more on that see my later post - Time For a Heart to Heart?):

·         Forfeit the lease. There’s not much point in doing this straight away unless you have someone else lined up to take the premises; after all you don’t want to end up paying empty rates. It’ll give you the premises back but it won’t give you the money you are owed. Of course, if the situation cannot be resolved, you might have to resort to this eventually, either by going to court or by “peaceable re-entry”.

·         Levy “distress” against your tenant’s goods. This is a self-help remedy that allows you (or more likely a certificated bailiff acting on your behalf) to enter the premises and seize your tenant’s goods without any legal process whatsoever, provided some  basic conditions are satisfied, and retain them until the rent arrears are paid or the seized goods are sold to off-set the rent arrears. Even the bailiff’s statutory fees are payable by the tenant. For more details here’s a post I wrote earlier this year.

·         Sue your tenant for the unpaid rent. This will only be worth doing if you think the tenant actually has the money. Or you could present the tenant with a statutory demand or winding up petition to persuade the tenant to pay or run the risk of being wound up.

You might be able to call on additional security given by your tenant when the lease was granted, such as a rent deposit or guarantee, or pursue former tenants under original tenant liability (if the lease is pre 1996) or under an authorised guarantee agreement.

What if your tenant has gone bust?

Here it gets more complicated and your advisors will need to look at the options with you carefully.

Generally speaking, the insolvency rules will often stop you taking action without the permission of the court or the consent of the insolvency practitioner.

Depending on what type of insolvency it is, you may find yourself dealing with a receiver, an administrator, a liquidator or a trustee in bankruptcy. There are different rules for each type.

Most leases will give you the right to forfeit the lease if your tenant is insolvent, but how much freedom you have to do so will be governed by the insolvency rules, again depending on what type of insolvency it is.

Perhaps your tenant has a guarantor.

Good news if the guarantor has some money; however, a recent case has shown you can’t always assume a guarantor will be dependable.

Did the guarantor clearly understand the implications (and risks) of a guarantee?

In Beardsley Theobalds Retirement Benefit Scheme v Yardley [2011] EWHC 1380 a director misled the landlord into believing that a former director of the tenant company remained on the board and was prepared to give a guarantee. The former director apparently signed the guarantee without a clear understanding of what it entailed.

The court decided that since the landlord knew of the tenant’s financial difficulties, it was only entitled to rely upon the guarantee where it had satisfied the following:

·         that the guarantor had provided the guarantee willingly;
·         an acknowledgement had been obtained from the guarantor that it had agreed to act as guarantor; and
·         it had evidence the guarantor understood the risks associated with entering into the guarantee.

These tests hadn’t been satisfied and so the Landlord wasn’t entitled to enforce the guarantee.

Take care when accepting guarantees.

Of course, the grimness of the age means it’s not just tenants who are biting the dust; landlords are too.

That’s something I looked at earlier in the year in my post What Happens if Your Landlord Goes Bust?

3 comments:

  1. This comment from Jim Culverwell on LinkedIn:

    If they are struggling to pay would recommend you try to help your tenant. He/she is your revenue stream. If you kill the goose that lays the golden egg, you may not find gold inside.

    Some tenants will fail in this economy but it is not in your best interests as landlord [in most instances] to allow that or even encourage it. Better by far to work with your tenants and help them through the hard times. Remember up until a few years back, Landlords had it good, with rising rents and cheap easy borrowing. Now the good times are over, don’t be like the banks and take away the umbrella.

    There are few very simple things you can do and may have done, will make life easier, like agreeing to accept rent monthly rather than quarterly; spreading service charge amounts out over a longer period; agreeing a rent increase rising over a few years rather than all at once.

    Above all, showing a human face and engaging with you’re tenants will generate a better result. You may of course be doing or have done all this and more, in which case, if your tenant is still unable to pay, then you need to negotiate a civilised departure. Nothing has been gained if you fall out and he leaves the place in various stages of destruction.

    On another tack, if you are not getting the revenue you ned to pay your mortgagee, you may want to consider a meeting with them which must include lots of facts and figures with strategies for returning to performing status. Like you, most mortgagees will not want their borrowers to fail.

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  2. These comments from Phil Travers on Linked In:

    I would suggest that if your tenant is having problems due to the current climate that you could depending on his lease put in a protective distraint, this protects any chattels (goods) this would 1.Give the tenant time to trade out of trouble with an agreed payment plan to clear the arrears. 2.Protect your landlord’s interests against any other creditors such as Business Rates and HMRC. 3.As often a payment arrangement plan would be put in place to clear the outstanding rent balance, these payments would be monitored by the bailiff and any missed payments would be flagged and a return visit would be actioned immediately. 4.The goods cannot be moved to any other location to try and defeat distraint as this would be pound breach, a criminal offence with a fine up to £5000. 5.This is a free service to the landlord as the tenant pays the bailiff fees. 6.A very fast remedy to recover commercial rent arrears, no need for court action as it is civil enforcement.

    Once the tenant has gone from the demise it is a very lengthy court process with additional cost to the landlord to recover your rent, the chances of getting your rent diminish significantly.

    We collect 97% (full payment) of commercial rent at first visit.

    Jim I agree with your comments entirely, the landlord must try and work with the tenant, however we are often contacted by the landlord after they have tried everything in their power to assist the tenant.
    I am under no illusion that we are the last resort, but with more and more tenants doing a "bunk" and leaving substantial unpaid commercial rent, is it not important and right for the landlord to try and protect themselves?
    I recently spoke with an elderly couple that had invested their life savings into a commercial property as a “nest egg” they lost tens of thousands of pounds in rent because they took the word of their tenant, they have no hope of recovering this money now, if they had enforced a warrant earlier they may of seen the signs and potentially limited their losses.

    We find if the rent is not being paid often other liabilities like business rates and the VAT are also not being paid, we work for 30+ council collecting unpaid business rates and we attend units were rent warrants are in place and we are unable to act, are the council going to give the tenant time? Will the HMRC? I think the answers to both are NO! so surely the landlord needs to try to protect his investment and this is the only way he can do this. We have put in place protective distraint with the blessing of the tenant, they see it as an opportunity to try and trade out of trouble and is seen as a positive move by the landlord, all you are doing is making an transparent agreement so all parties know what is expected from them going forward, responsible commercial landlords should see past the word bailiff and see this as a very effective tool for their business.

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  3. This comment from David McCall via LinkedIn:

    I totally agree with Phil's comments!! I had not one but two Tenant's who had total disregard for any of their financial obligations and eventually left the premises with large bills unpaid and also the buidlings in a total mess and this was premises that I had totally refurbished and costs thousands to do!
    I then had to spend more money to put both these properties back in order at my expense!
    I wonder if Jim would like to be left in that situation? I put a lot of time and money into making these properties top class only to find the buildings a shambles! I have also been left the the utility companies chasing them for thousands of pounds and Tenants thought that i would be left responsible with the costs! Obviously, they hadn't read their Lease agreement at all!
    Lastly, i did try as hard as i could to help both Tenants with any financial difficultes but I all met were continual lies and just being fobed off!

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